Unity Software Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 20, 2025

There are 13 speakers on the call.

Operator

that today's discussion contains forward looking statements, including statements about goals, business outlook, industry trends, market opportunities, expectations for future financial performance and similar items, all of which are subject to risks, uncertainties, and assumptions. And you can find more information about these risks and uncertainties in the risk factors section of our filings at sec.gov. Actual results may differ, and we take no obligation to revise or update any forward looking statements. Finally, during today's meeting, we will discuss non GAAP financial measures. These non GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

Operator

A full reconciliation of GAAP to non GAAP is available in our press release and on the sec.gov website. Before we begin, please note that starting this quarter, we have made available on our investor relations section of our website a new investor friendly spreadsheet that includes our quarterly and annual SEC financials, associated non GAAP bridges, KPIs, as well as new disclosures with incremental details around revenue breakdown that we hope will be helpful. There will be more to come as we endeavor to further help investors understand the Uniti investment story. With that, I will pass the call to Matt.

Speaker 1

Thanks, Daniel, and good morning, everyone. On behalf of all the good people of Unity, I'd like to thank each of you very, very much for joining us today. On our prior calls, we've talked about the principles powering the transformation of Unity, how we're building a culture of execution and discipline, reestablishing trust with our customers and the community, and accelerating the pace of product innovation and quality. Although it's still early, we can clearly see how these principles are fundamentally changing the company, and our optimism is increasing with each passing day. Uni's results in the fourth quarter reflect real progress, meaningfully exceeding our guidance for both revenues and adjusted EBITDA.

Speaker 1

Revenue on our strategic portfolio grew at its fastest rate in four quarters, and adjusted EBITDA beat the top end of our guidance by 26%. It's good for the company to get back to competing effectively, and we're proud of the team for delivering financial results in Q4 that demonstrate solid execution. But to be clear, it's not our aspiration merely to compete. We're here to spark rapid, sustained long term growth. So I'd like to take a few minutes this morning to detail precisely how we're going about that.

Speaker 1

Let's start with our advertising business. Q4 results in our Grow segment exceeded our expectations and were the best we've seen in the last year, driven by strong holiday demand and improved ROI for our customers. But although the results exceeded our expectations, they are clearly not enough to satisfy our ambitions. We firmly believe that we have the assets and the capabilities to grow much faster. And so today, we're excited to officially announce the migration of the Unity Ad Network to our new AI platform, which we're calling UnityVector.

Speaker 1

The migration begins towards the end of Q1 with this first phase of work slated to be complete by the end of Q2 twenty twenty five. Ongoing efforts to expand the scale and our quality of our offering will, of course, continue thereafter. Vector is designed to leverage data from across the Unity ecosystem, integrating self learning artificial intelligence models that will provide deeper insights, optimize performance, and deliver better results for customers. Vector enhances targeting precision and increases audience scale through a sharper analysis of richer datasets, and it's also able to adapt in real time, helping customers navigate an increasingly competitive mobile marketing landscape. Although our enthusiasm around this planned transition is very high, we do want to highlight the iterative nature of the work and to caution some patients around the time we'll need to mature the product as it begins to operate at scale.

Speaker 1

UniVector is a significant undertaking and we won't see the benefits immediately. The caution in our Q1 guide reflects some prudence with respect to this. With that as context, we remain confident that the introduction of Vector will establish Uni as a fundamentally stronger competitor in the years ahead. I also do want to know how proud we are that we've been able to move Unity Vector in production at this velocity and to thank everyone involved. It speaks to a significant enhancement in our operating capabilities as well as to the passion and dedication of the team.

Speaker 1

The same appetite for rapid change, increased growth and delivering more product value is also very much present in our Create business. So let's turn there now. Customers have responded immediately to the cancellation of the runtime fee and the launch of Unity six. And we're now closing new deals and booking renewals at a rapid pace. This is reflected in the 15% year over year increase in subscription revenues that we experienced in Q4.

Speaker 1

Unity six is being sampled at a higher volume than our other recent releases and nearly 38% of our active users have already upgraded. Additionally, Unity six has already been downloaded 2,800,000 times since launch. In 2024, Unity maintained its position as the top game engine in the world, with more successful games being built in Unity across more platforms than any other engine. Of note, about 70% of the top thousand mobile games worldwide were made with Unity, including the top three grossing mobile games. And 30 of the top 1,000 PC games on Steam are made with Unity as well.

Speaker 1

As new kinds of devices are introduced, Unity continues to show strength and flexibility in its platform. For example, we are leading the way in mixed reality and spatial computing. Batman Arkham Shadow, a made with Unity title, launched exclusively on Meta Quest three in October and won the best ARVR game at the twenty twenty four Game Awards. In fact, seven out of the top 10 AR games in 2024 were made with Unity. In Q4, we also announced a significant co development partnership with Google that provides day one support of the new Android XR platform.

Speaker 1

This collaboration reinforces Unity's position as the leading real time three d development platform and highlights the growing investment in XR for major industry players. As XR grows, UNI will grow with it. And this growth will not just be limited to gaming. Beyond gaming, UNI adoption continues to accelerate across important markets like automotive and retail where our cross platform three d visualization tools are very much in demand. We had a stellar quarter in our industry segment with revenue growth of 50, making it once again our fastest growing subscription business.

Speaker 1

We also recently announced several significant new customers, including Toyota, who selected Uniti to power all its next generation human machine interface, enhancing the in dash driving experience for all its customers. And RTX company Raytheon was using Unity to create three d simulations for facilities planning and factory layouts. In conclusion, I'd like to thank all of our teams for their relentless effort as we continue to transform Unity and earn our customers' trust each day. Together, we're shaping the future of interactive content creation, building a new platform that will enable the next generation of developers to innovate and move from prototype to profitability faster and more efficiently than ever before. Uni is the only company we know of that can deliver value to developers of games and interactive experiences across the entire lifecycle, from prototyping to live service operation right through user acquisition monetization.

Speaker 1

That capability and its connection to the 3,000,000,000 monthly downloads of applications created with Unity positions us well to become the global platform of choice for creators of interactive content. As the quality and the integration across our product portfolio continues to improve, AI continues to advance and true platform advantages begin to manifest, we're confident we'll be able to deliver significantly more value to customers and in the process transform our business. Thanks again for your time and attention this morning. I'd like now to extend a warm welcome to Jared Yayes, our new CFO. Jared's an outstanding addition to our leadership team and we're all really looking forward to working closely with him.

Speaker 1

I'll turn it over to Jared now for an overview of our financial performance. Jared? Thanks, Matt.

Speaker 2

Convinced of Unity's extraordinary potential based on our truly global scale and unique end to end customer value proposition. Unity is taking to our business in terms of how we're allocating capital and delivering returns for shareholders. We plan to focus R and D towards the highest impact initiatives in order to accelerate revenue growth with the joint goal of capitalizing on the largest and fastest growing market opportunities while fulfilling the promise we make to customers and developers who use Unity every day. We intend to complement revenue growth with ongoing margin expansion and drive operating efficiencies over time. And we're committed to driving growth of adjusted EBITDA and free cash flow in order to maximize return for shareholders.

Speaker 2

Lastly, we expect to be prudent stewards of shareholder capital. We have a robust balance sheet with excess cash and solid free cash flow. Our near term expected uses of capital will be to focus on organic innovation at the company and gradually delever to ensure conservative balance sheet. Turning to the fourth quarter, I am pleased to report that Uniti meaningfully exceeded our guidance for both revenue and adjusted EBITDA. Revenue from our strategic portfolio is $442,000,000 up 4% year over year or fifteen million dollars above the high end of our guidance.

Speaker 2

Both businesses outperformed solidly. Create solutions revenue from our strategic portfolio was $139,000,000 up 9% year over year and up 6% sequentially. The year over year increase was driven by another quarter of strong 15% growth in subscriptions revenue combined with accelerated growth in industry revenue of 50%. Investors should note that the strong fourth quarter growth in subscription revenues does not yet reflect the positive impact from the recently announced price increases. Those price increases will roll in ratably from our pro and enterprise customer tiers over the course of 2025 and 2026.

Speaker 2

Gross solutions revenue from our strategic portfolio was $3.00 3,000,000, up 2% year over year and up 2% sequentially. This is the best quarter we've seen in the past year and the solid results were driven by better execution combined with seasonal demand. Supporting the strong revenue results, Uniti experienced sequential improvements in terms of both dollar based net expansion, which improved by 2% to 96% and customers over $100,000 which improved to twelve fifty four customers. During the fourth quarter, revenue from our non strategic portfolio was $15,000,000 down 92% year over year as a result of our portfolio reset. We expect that in 2025, this revenue will be approximately $30,000,000 for the full year and remain stable thereafter.

Speaker 2

With the hard work of winding down the non strategic portfolio now behind us, Going forward, we will report and guide to total revenues and provide total revenues for each of create and grow simplifying our disclosures for investors. Turning from revenue to non GAAP profitability, adjusted EBITDA for the quarter was $106,000,000 representing 23% margins. Adjusted EBITDA exceeded the top end of our guidance by 26%. And for the full year, Uniti delivered adjusted EBITDA of $390,000,000 at 21% margins. Adjusted EBITDA benefited from improving gross margins and operating leverage in the platform combined with solid cost management across expense lines.

Speaker 2

Adjusted gross margins improved from 82% in 2023 to 83% in 2024. While adjusted G and A, sales and marketing and R and D expenses were down by a combined $235,000,000 in 2024. There's still untapped operating leverage in the platform and we are poised to improve profitability as we grow. Uniti had exceptional free cash flow in the fourth quarter and for the full year. Free cash flow was $106,000,000 in the fourth quarter, up 74% from $61,000,000 in the prior year.

Speaker 2

Free cash flow for the full year was $286,000,000 up 60% from the prior year. Cash at the end of the quarter was $1,500,000,000 and debt was $2,200,000,000 With significant free cash flow generation in the past year, we took the opportunity to delever, repurchasing $415,000,000 of debt while maintaining a robust cash balance. Based on our free cash flow profile and the excess cash on our balance sheet, Uniti has a clear opportunity to gradually delever over the next several years. Going forward, as we focus on per share returns, we'll also aim to reduce shareholder dilution from stock based compensation. Share count dilution from stock based compensation has gone from just under 3% in 2023 to just under 2% in 2024, and we believe it has the potential to come down further.

Speaker 2

Stock based compensation expense is also expected to fall by 30% in 2025 with the lapping of M and A related vestings and a sharper focus on minimizing dilution. With that, I'd now like to turn to guidance for the first quarter. We're expecting total Q1 revenues of $4.00 $5,000,000 to $415,000,000 and adjusted EBITDA of $60,000,000 to $65,000,000 Revenue guidance takes into account our expectation for reduced revenues from our existing ad models in the first quarter and the gradual nature of our transition to UnityVector. Our revenue guidance also takes into consideration seasonal demand and additional working days in the fourth quarter as compared to the first quarter. Our adjusted EBITDA guidance factors in our expectations around first quarter revenue, as well as normal increases in payroll related expenses and incremental cloud costs associated with ongoing investments in UnityVector.

Speaker 2

One final note, while we have typically provided annual guidance during our fourth quarter call, we'll be transitioning to quarterly guidance in 2025 given the rapid change and transformation taking place in our ad business. And with that, I'd like to thank you for joining us on Uniti's first quarter twenty twenty five conference call. And let me turn the call over to Daniel so that we can take your questions.

Operator

Thank you. And with that, we will open it up to questions. All right. So the first question is from Matt Kost at Morgan Stanley.

Speaker 3

Hey guys, can you hear me?

Operator

Yes, we can.

Speaker 3

Awesome. All right. Good morning. Thank you for taking the question. I guess I just want to start with the guide just to make sure we can break down the pieces here.

Speaker 3

So I think it's a step down of like $40,000,000 to $50,000,000 quarter on quarter. How much of that is reduction in the strategic revenue, which I think was $15,000,000 in 4Q? How much of that is driven by step downs in kind of the legacy ad products in Grow? And is there any offset in there from the new ad model stepping in? And then I have one follow-up.

Speaker 3

Thank you.

Speaker 1

Hey, Matt. Thanks very much for your question. I will, I'll let Jared take most of this question. But I just want to reiterate where we opened, which is that, you know, at the at the end of the day, most of this is just driven by some prudence about precisely the timing of the revenue lift we're gonna get through this transition. It's a it's a big product rollout and one that that takes time to take root as we operate the models at scale, and that's the that's the really the the principal driver.

Speaker 1

But I'll I'll I'll leave it to Jared to go into a little bit more detail.

Speaker 2

Yeah. Matt, just a couple of comments. Number one, I think we gave some disclosures around our non strategic revenue for the quarter being $15,000,000 for the fourth quarter. We'd expect that to roll forward. You know, the the majority of the prudence and the conservatism is really around the transformation that's taking place in the ad business.

Speaker 2

As you would have seen in the fourth quarter, you've seen great strong growth in in create and the growth in our subscription business. We feel good about that. Our existing models perform well in the fourth quarter. We're proactively deciding to make a shift. We think this is a necessary shift where we can be more competitive and ultimately accelerate the revenue growth of the company.

Speaker 3

Great. Thank you. And then on the create side, the 15% growth in subscription kind of, and I think you called out no impact from the price increases that were announced in September. What are the drivers of that subscription growth? Are you seeing some step up in in seats?

Speaker 3

Is there some other pricing tailwinds? Like, what what are the moving pieces to have 15% without those September price increases kicking in yet?

Speaker 1

Yeah. Matt, you'll remember that we had a prior round of price increases that have been flowing through on a reflected there. And I'd say that the other main driver is just some real velocity and reconnection that we've had with our customers, not literally as much because we're seeing the the the pricing the new pricing increases flow through, but because we were, we were effectively kind of in a in a little bit of a frozen mode prior. As you recall, the looming price increases were tied to the upgrades to Unity six and, had sort of, again, had sort of frozen conversations we had with folks, lots of ongoing conversations about new deals and expanding relationships. So this reconnection we've had with our customers is just related to more deal velocity and, and put us in a much better place.

Speaker 3

Great. Thank you so much.

Operator

Thank you, Matt. Gilly, Novtolovich from Goldman Sachs.

Speaker 4

Hey, everyone. Thanks for taking the question. I have two, one a little bit more on the quarter and then one that's a little bit more level on

Speaker 5

the competitive landscape. So if I may on the first, you know, you mentioned 38% of new users moved to Unity six already or are part of the migration. I believe that's facing well against your prior model update. So I'm curious to know how that's tracking versus your initial expectations and maybe how that may affect the way your pricing may be a more material contributor to growth in calendar twenty five.

Speaker 1

Absolutely. Well, hi, Gilly. Nice to hear from you. Yes. Indeed, it is tracking really well, and and and we do think it's tracking more positively than than than prior new releases we had.

Speaker 1

So we're really, really encouraged about it. You recall that that when we launched UNI six, again, in addition to to what we thought was more customer friendly pricing, we also, really helped our customers understand that we want to focus on core values that are really, really important to them, stability, performance, and ease of upgrade. And we want to really kind of lean into those values while also, of course, pushing the binary forward and adding additional features, but really, really making sure that we're delivering on the core. And I think that message has has really landed in a positive fashion for our customers. And that, again, keep in mind that our big live service customers could be operating on Unity six for many, many years.

Speaker 1

So, making this transition in the right way, and leaning into some core values that are gonna make it easier and better for customers to use Unity than ever before. It's just really important, and and we're seeing a lot of really positive velocity from it.

Speaker 5

Understood. Thank you. And a bit on that thread, I the second question I had was a bit more on the competitive landscape. You know, we've heard Microsoft launch its video gaming development offering yesterday, and OpenAI has suggested that AI tools like Sora can be used for game creation in the future. While appreciating these are seemingly a lot more console and web based today, it'd be great to get more color around your initiatives on on how you're taking this on and making sure that Unity is in the forefront of innovation and market leadership with Unity six and maybe future releases beyond that.

Speaker 1

Yeah. Absolutely. It's a great question. Here's the most important thing to remember and understand about Unity. We are a platform, and our greatest strength has always been our extensibility.

Speaker 1

So we're gonna be the assembly point for building interactive experiences and deep systems around three d assets. Those three d assets can be created outside our tool, can be created inside our tool, as long as we can, ingest those assets and then begin to build experiences and systems around them, we're gonna be in really great shape. I have no doubt that and we're all really excited by the advances in generative I AI that we're seeing across, you know, across the world right now. But building, a major live service game that's played by millions of players is not just about creating assets. It's creating deep online systems, optimization systems that engage players over the long term.

Speaker 1

And, it's our position to wanna be the platform that creates all those systems and to ingest any and all, assets as we go. I hope that makes sense.

Speaker 5

Yes. Thank you.

Operator

Great. The next question is, David Mack from Arete.

Speaker 6

Hi. Thanks for taking my question. Just trying to get a sense of the fundamental rebuild of growth solutions, and the timeline involved in that. You mentioned being a stronger competitor over the years ahead, But what is the expected timeline between where you are now and the new products hitting the market? And it would also be great to hear what the key personnel are working on specifically.

Speaker 6

Thank you.

Speaker 1

Hey, David. Nice to hear from you. So, you know, as we've talked about before, over the past two quarters, we've been been doing the fundamental work of building out, the UnityVector system. And I think we we talked about last quarter how we began testing on live data. So effectively, though, our progress in testing has been really rapid, and, we are so pleased with the progress that, you know, we we want to communicate the fact that we'll be beginning a full migration to our new system, at the end of this quarter and that the first part of that work will be complete by the end of Q2.

Speaker 1

And it's important to understand, I know you understand that this is an iterative process. It's going to go on for some time. We're going to be building and scaling and creating more velocity and quality in the system forever. So this is just the first first part of the work. And the system is really based around improving sort of three core attributes, or at least we should we should begin to feel the impact of real time adaptive self learning models, most acutely in in three areas.

Speaker 1

The first one is around better conversion. So the idea that we can more accurately predict what new game a player would like to play. Secondly, somewhat less importantly but still crucially, we wanna be able to match the most valuable players with the right games. And finally, we wanna enhance our ability to bid effectively into competitive auctions for those players. So those are the three, significant pieces we've been working on, three significant kind of core values of the system, and we're excited over time.

Speaker 1

We believe, there's no reason not to believe that that's gonna really enhance the ROI that we're delivering to our customers.

Speaker 6

Thanks very much. And just a quick follow-up, if I may. You mentioned improving conversions. Am I right in thinking that user acquisition tools and demand side platform revenue is a relatively small part of growth solutions today. And so if you do launch an effective product, this is effectively a new business for you and it would be more impactful to grow solutions as opposed to just a slightly higher growth rate over the years ahead.

Speaker 6

Thank you.

Speaker 1

Hey, Dave. No. I wouldn't I wouldn't put it that way. We have a substantial user acquisition business today, but it's it's one that hasn't been as competitive as it needs to be. So, the way I think about this is that it, you know, it's it's it's a good business today.

Speaker 1

We hope and expect that over time it'll become a great business.

Speaker 6

Thanks again.

Operator

Thank you, David. So next question is, Parker Lane from Stifel.

Speaker 7

Hi, guys. Can you hear me okay?

Speaker 8

Yep.

Speaker 7

Great. Looking at some of those deals in the industry's business, Toyota, Raytheon during the quarter and the overall growth rate, it seems like a lot of things are going well there. Wondered if you could talk about pipeline development and what you see for that business into 2025 and how competitive are some of these large enterprise deals on the industry's business today?

Speaker 1

Hey, Parker. Thanks for the question. Yeah, we're really excited about the growth we're seeing on our industry business and, you know, really the continued growth in q four and what we expect, and we expect that to continue. As I mentioned, it's it's our fastest growing subscription business, and for it to grow 50 year over year was was was really encouraging. Listen, all all significant deals with major players are gonna be competitive, and so we do see competition in the marketplace.

Speaker 1

But having said that, you know, we have a pretty unique offering in the marketplace. So focusing on this three d visualization and creative and and, creation of interactive experiences around it, focusing really narrowly on that is starting to really show results for us. And we're also focusing very hard on auto retail and manufacturing in particular. So we've seen the benefits of focusing both sort of on the product offering as well as in our go to market efforts. We are very, and we don't see a we don't want to see lots of offerings that can really deliver the kinds of value that we can.

Speaker 1

The other thing we have going for us is that a lot of our business historically has been pull rather than push. So because our tools are so popular across different industries, we often get groups of developers inside an entity adopting tools without even ever speaking to us, and then we become aware of it. They reach out to us, and we grow relationships that way. So what we wanna do is complement that with a more effective go to market mechanism, a kind of push mechanism, if you will, as well. So we're working really hard to expand our partnerships with, with resellers, with other large systems integrators so that we can really kind of in in high volume begin to close the scale and size of deals that you're starting to see now with much with much more effectiveness and efficiency.

Speaker 1

And we don't see any reason why that that shouldn't happen. So, yeah, we're feeling very good about it.

Speaker 7

Got it. One quick circle back to Vector. You know, it's a significant undertaking. It will be an iterative process through the years. Just wondering how much of the r and d groundwork has already been laid here versus some incremental investment that we're gonna be seeing manifest in the model, throughout '25.

Speaker 1

Yeah. The vast majority of the r and d, groundwork has been laid to your point. So the the the investment you'll see going forward will likely mostly be in the kind of cloud area where we're, where we're continuing to train models as they expand. But even that should become more efficient over time and is something that's done more efficiently with our new models than than was done with our old models. So, we're feeling pretty good about, about how it will play out through our P and L over time.

Speaker 7

Understood. Thanks again.

Operator

Next question is Tom Champignan from Piper Sandler.

Speaker 2

Matt, you've been very candid about competitive challenges and grow. So, just curious how Vector addresses some of the issues with, the ML stack deficiencies and and data infrastructure. And then secondly, how should we think about the iron source, network in the context of the transition to to vector? Thank you.

Speaker 1

Yeah. Hey, Tom. Thanks for the question. You know you know, again, as we've talked about many times before, it's it was our view that in order to compete over the long term, we needed a fundamental change in in our tech stack and how we're approaching this business. And and I and I think maybe when we first began talking about it a couple of quarters ago, it was maybe a sense that, you sort of who knows, is this the science project?

Speaker 1

Is this gonna take years? How long is it gonna be? Is it gonna have massive impacts on margins? And I think what's what's sort of really exciting about where we are now is that we're starting to see this come into the real world and for us, and we we we're gonna start seeing it have impacts. And it's just I'm really, really pleased and proud of the team for being in a position to do this build out and make this major transition so quickly.

Speaker 1

And to your point, we do expect us to, we do expect it to put us in a better position competitively over time. But, you know, again, understanding that the work here is just beginning, and that there is, there is much of it still ahead of us. But the you know, having a new model that provides a more detailed and consistent understanding of the implicit preferences of gamers at the game level, It gives us a more granular view and a better prediction of what gamers will respond to. This is, you know, is really important, and we do believe over time it's gonna create a lot of value. We, our new models have fast input processing.

Speaker 1

They iterate more quickly in a more timely way than we're accurate. We've incorporated more real time features so that the model can dynamically reflect gamers' preferences. So these are, you know, these are all fundamental shifts, that again, lots of work to do, but put us in a in a position to to be able to compete for the long term.

Operator

Thanks, Tom. Next question is, Andrew Boone from JMP Securities.

Speaker 9

Thanks so much for taking my questions. I'll stick with advertising. Matt, can you talk about the opportunity to better integrate data sources into the ad stack? How much does Vector incorporate in terms of just taking additional information that you guys have available as Unity versus kind of what was the previous model. And then looking at some of your competitors, there's been an expansion of the gaming advertising category into into other kind of verticals.

Speaker 9

Can you talk about that broader opportunity of what may ecommerce look like or or other kind of industries that may be available over time? Thanks so much.

Speaker 1

Yeah. Absolutely. Thanks thanks for the question. Yeah. Listen, if we've as we've said before, we believe the Unity platform has some unique value and that ultimately our deep understanding of player behavior globally is an asset, that through incorporation, you know, into our data models is going to have a meaningful impact.

Speaker 1

And keep in mind that we have nearly 5,000,000,000 DAU of players that interact with our runtime globally. And historically, we've not leveraged this connection this first party connection of players at all, and that's a connection that dwarfs the size of other networks, in the world. And we were working really hard to change this and to building these capabilities in a privacy safe manner where where we're getting opt in permission wherever that's necessary. And, and all the fundamental work we're doing is designed to create an environment where we can incorporate more and more of that data over time. So it's very much part of our plans and part of the work that we're doing.

Speaker 1

As it relates to sort of ecommerce and other verticals, I I'm I'm really bullish on the opportunities that we have there. I think that what what folks are waking up to is that the the quality of the relationships that that that we and others have in this space and the scale of, of our audiences are gonna be really valuable, across other verticals and and other ad types. And that's because, you know, gamers are basically everyone. And to the extent we've developed really detailed understanding of consumer behavior and really good systems, that's gonna that's gonna benefit us in the industry in lots of different ways. For us, we're focused primarily in the near term here in the gaming vertical, and in fundamentally improving the way we address our core customers.

Speaker 1

But we're also really bullish over time that there are that there is expansion there and and exciting that the excited that the market's waking up to that.

Operator

Thanks, Andrew. Next question is, Ross Sandler from Barclays.

Speaker 10

Great. Can't let Jared get off the hook here without asking a cost and margin question on his debut here. So Jared, I guess the overall comments about improving margins in 2025 and beyond, you guys mentioned increased cloud costs for Vector model rebuild. Could you just put some numbers around that and maybe around like your go to market once Vector is launched? And I guess broadly as we look out over the next couple of years, if Vector revenue does start picking up, should we see the kind of high incremental margins that we see broadly in the digital ad market starting to show up here?

Speaker 10

Thanks a lot.

Speaker 2

Sure, Ross. And I I really appreciate you not letting me off the hook on my, on my first call. We have done a great job as a company in driving margin and really making sure that we have the right cost structure for where we are as a business today. If you look at the EBITDA margins of the business, EBITDA is up by a percent year on year. We've done a good job in bringing down G and A costs.

Speaker 2

We've done a good job in bringing down, bringing up gross margins for the business. So we feel really good about what we've done and we've done that all the while making the requisite investments, in Vector. If you look over the past couple quarters and you look at cost of goods sold where a lot of our cloud costs reside and you look at r and d costs, those have gone up by about $10,000,000 a quarter over the past couple quarters, evidencing some of the investment that we've been making. So we've been at the same time driving margin expansion and making the requisite investments in Vector, which we think is the right thing to do for the business. This is a business with 80% plus adjusted gross margin.

Speaker 2

There's a lot of leverage ability in our model and a lot of operating leverage in that model. And so as you would expect, it's going to become even easier for us to expand margins as our business starts to grow and as that acceleration takes place. So we're going to get that benefit of vector both in terms of revenue growth, but also in terms of operating leverage and margin expansion. And I think we look forward to that. Right now, our near term priority is to make the required investments in Vector to get back to a pace of revenue growth that we're comfortable with and we're pleased with.

Speaker 2

So that's going to be the near term focus, but we think we can walk and chew gum. We think we can continue to drive margin plus also make those investments.

Operator

Thanks, Ross. Next question is, Chris Contaraj from UBS.

Speaker 8

Great. Thanks for taking the question. I just want to, touch on Vector here for a second and really focus around 2Q and the migration that's going to be kind of unfolding here. How should we be thinking about this more tactically? Are certain advertisers going to be seeing this earlier in the quarter and it's gonna be rolled out more so on a regional basis?

Speaker 8

Or should we be thinking about some of this functionality and your ability improving, improving around conversion and matching the right user with the right game in the efficiency of the, of your bids within the auctions, just kind of improving through the quarter and and all advertisers will be seeing this really at kind of the start of February? Thanks.

Speaker 1

Yeah. Hey, Chris. Thanks for the thanks for the question. Yeah. The way to think about it is this.

Speaker 1

The integration, first will, will take first iOS traffic, then later Android traffic. So the they'll there's a step, there's kind of two steps there. And then the first part of the the first part of the work focuses really, hard on on on our conversion models to create better conversion. The second part of the work, and that that spins out over time, works on kind of user value, so matching the most valuable players with the right games and the bidding models, and and aiding us in in effectively bidding in in these competitive auctions for players. So, it that's the sense in which, we're kind of taking that one step at a time and and and why it grows over time.

Speaker 8

Got it. Thank you.

Operator

Thanks, Chris. Next question is Michael Funk from Bank of America.

Speaker 11

Yeah. Thank you for the questions, guys. First point of clarification on Vector and the timing of the rollout. You're now saying migration end of 1Q. I think previously you said you said midyear, that was the first part.

Speaker 11

And then second, the the first quarter guidance, how much of that incorporates disruption to the Grow business due to the migration versus, say, seasonality?

Speaker 1

Yeah. Thanks for thanks for the call for the question, Michael. Yeah. We are the the rollout is, has gone much has more more quickly than we anticipated. So the work has gone really well.

Speaker 1

It's gone more efficiently, and we're really pleased to to be doing it, to be, to beginning the rollout, yeah, about kind of a quarter before we expected. Although as I said, it's a it's an iterative process. So, you're you're you're right about that. And as it relates to the kind of the prudence in our guide for the first quarter, yeah, it it is anticipating some, some disruption, in in our existing, you know, in our existing ad business as we transition from one to the other.

Speaker 11

And can you share a performance comparison, new versus old model, maybe genres, geos, or or devices, what you're seeing?

Speaker 1

Yeah. That that work is kind of ongoing and not not something we're talking about just yet. But at, you know, at a high level, you know, this is, you know, a brilliant flash of the obvious. Our our goal is for the the new models to outperform the old models over time.

Speaker 11

Great. Thank you again.

Operator

Great. And the last question will come from, Clark Lampen from BTIG.

Speaker 12

Thanks for taking the question. I just want to make a I guess clarify, some of the questions and I guess sort of answers that we gotten around the vector transition. So essentially what we're seeing happen right now is a consolidation of a couple of different, operating assets previously. I guess if we're thinking about like IronSource, Tapjoy and Unity Ads independently, They're getting consolidated down to one asset. And is the expectation now that maybe as part of that migration, some customers might not fully migrate budgets.

Speaker 12

I'm just curious if you're seeing one, if that's correct, and two, if you're seeing any evidence of either less than a % migration or any sort of pause on a like for like basis along the way so far.

Speaker 1

Hey. Yeah. Thanks for the question. So, so no. The the the work around Univector is principally work that's being done around the Uni ad network.

Speaker 1

We're excited and supportive and continue to be bullish about the opportunities we have for the IronSource ad network as well, and we'll remain in the market very aggressively selling that, selling on that network as well. But to your point, the overall in the migration, we are taking several assets we have to your including Tapjoy and others and consolidating, the data, around each of those what had been prior been vertical businesses and and migrating them into one central data source, which we think improves all the products. But is it the same as collapsing those products in?

Speaker 12

Understood. Understood. And and if I can just ask one more sort of clarification around, create performance this quarter. I think Matt sort of at the top of the order asked a question around sort of what's embedded here. Maybe to put a finer point on that, was there a plus to pro migration benefit in 4Q?

Speaker 12

And as we're thinking about sort of organic growth and the trajectory of the non gaming editor business, any directional commentary you can give us for for 25 or the contribution for the former item? Thank you.

Speaker 1

Yeah. It's my pleasure. Thank you. Yes. There was some impact of the plus to pro migration to your point.

Speaker 1

There was definitely impact, an increased velocity in our industry business, which we're really, really excited about, as well as the impact, as I said, of just resetting our relationships with our customer base, and spending more positive time with customers. We think all those all three of those trends will will continue. And then what we'll see in 2025, in addition to those three trends, is the beginning of the rolling in of the of the major price increases around your subscription business, which will you'll see in addition over '25 and '26.

Speaker 12

Understood. Thank you again.

Speaker 1

Thank you.

Operator

Thanks, Clark. So with that, we'll wrap up. So thank you for dialing in today. We look forward to seeing you at one of our upcoming investor conferences that we're going to have this quarter. And have a great day.

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Earnings Conference Call
Unity Software Q4 2024
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