Unity Software - Q1 2023
May 10, 2023
Transcript
Richard Davis (VP of Investor Relations)
Welcome to Unity's Q1 2023 earnings call. After the closing of the market today, we issued our shareholders letter. The material is now available on our investor website at investors.unity.com. Today, I'm joined by John Riccitiello, our CEO, President and Chairman, and by Luis Visoso, our CFO. Now, before we begin, I want to note that today's discussions 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. You can find more information about these risks and uncertainties in the Risk Factors section of our filings at sec.gov. Actual results may vary, and we take no obligation to revise or update any forward-looking statements. As in prior quarters, we are providing both GAAP and non-GAAP financial measures.
Unless otherwise noted, we will be speaking to the non-GAAP financial measures when describing our results. The shareholder letter and our filings on sec.gov provide full GAAP to non-GAAP reconciliations.
Okay, great. Thank you. First let me turn the call over to John for just some brief highlights of our results. John?
John Riccitiello (Executive Chairman, President, and CEO)
Look, we're very pleased with our Q1 results and happy about our guide. I wanna start by just thanking all of our colleagues at Unity. They've done a fantastic job to get us off to a great start in 2023. I have to say that our results, these strong numbers reflect great synergy between our 2 main businesses, Create and Grow. We're a true platform, by platform, what I really mean is that our customers get every day from us something that is more than the sum of the parts. They get more value than they would from individual products, that's being proven truer and truer by the day, it's from this that our customers win and Unity wins.
All of this allows us to put Unity at a place where we can serve our creators in a great way and to be on a strong path towards continued profitable growth. I think it's obvious that there's a subject that's on everybody's minds. It's certainly on every other question you read or every press article, AI. I know you saw in our shareholder letter a long conversation about AI. I have to tell you, I'm excited about it. We've been working on it for several years at Unity. We've got advanced products that we've been deploying for years now and more coming, and we've announced a number of beta products. Here I wanna make a couple of key points so it's not lost.
First, I think AI is positive for our industry and positive for our creators. Second, Unity has sustainable competitive advantages in and around AI, not just because of what we're building in AI, because the very nature of our platform. The very nature of our platform will benefit from AI tools and content creation, and we're uniquely able to enable creators to make things where worlds come alive or, you know, digital twins coming alive in ways that were never possible before. These things, to us, seem like a strong tailwind in the quarters and years to come, and we couldn't be more excited about our future. Thank you, everyone, and thanks for being here.
Richard Davis (VP of Investor Relations)
Great, John. Like always, we're gonna open up the call in just a bit. Maybe to get things rolling, let me kick off the question and answer session with, like, a couple questions that are on investors' minds. The first one would be for Luis. Look, with a, with a strong Q1 in the books, you know, how does the balance of the year look?
Luis Visoso (SVP and CFO)
Hey. Thank you, Richard. You're right. It was a strong Q1. Frankly, as John said, it was driven by strong execution by the Unity team. We beat the high end of the revenue guide by $20 million. We beat the high end of the EBITDA guide by $20 million as well. If you compare this to the Q1 of 2022, that's a $55 million EBITDA improvement. We're also pleased with the Unity and IronSource integration. The teams are working very well together, and we're starting to share and reapply best practices between teams, and we believe that we're performing better than the market. Yes, it was a very good Q1. Back to your question, how does the balance of the year look? Well, we expect growth and profitability to accelerate throughout the year.
We're guiding Q2 above consensus for both revenue and EBITDA. For the full year, we're being prudent. You know, I mean, we all read the same news, and the economic environment is still volatile and uncertain. What we did is we raised the low end of the revenue guide by $30 million, and we raised the low end of the EBITDA guide by $20 million. We expect to continue to perform better than the market. While you did not ask, we are still committed to our $1 billion EBITDA run rate by the end of 2024. With that, I'll turn it back to you, Richard.
Richard Davis (VP of Investor Relations)
Great. Then John, you did touch on it a bit in your introduction kinda summary, but maybe if you just unpack a little bit, discuss how kinda Unity sees the emergence of AI tools and platforms, and then we'll open it up to a full Q&A for everyone.
John Riccitiello (Executive Chairman, President, and CEO)
Sure. In general, at least as I see it, AI in the world we live in, the world of real-time 3D, has some important provable points. In general, I think you could break it down into 2 ideas. What you can do with the editor and what you can do in content creation, it's gonna be faster and cheaper. Developers will be able to do more on our platform, and that applies to the game development side and the digital twin side. We're seeing a lot of interest in our platform, and part of that is because of AI. We've always seen that interest. It's strong. Obviously, our shares are very strong across the board. It's developers embracing AI to produce better content faster, better, cheaper. That's always a good thing in our world.
The second aspect of this is that they can do things that were never before possible, and this is where it gets really exciting. It's when non-player characters in games speak to you like they do in a ChatGPT app. They're intelligent. They have ambitions. They're not just scripted dialogues from a writer. Their actions also are freer, and what that results in, I think, is worlds on the gaming side that are gonna be so compelling that it's gonna drive an inflection point in growth in gaming. The second aspect of this, that same idea applies to digital twins, and we've always felt that real-time digital twins was a big advantage. Real time makes a difference. What we get to now is AI-enhanced real time, and we wrote about that in our shareholder letter.
What that gives you is a digital twin which is just not catching you up to the moment, but helping you do next what is necessary to run your factory better, to design a better building, to teach people in a better way, to run a better airport or at least a smarter airport. All the things people are using us for now gets better, faster, and more future-looking in a way that really enhances their business. We feel great about AI. We're gonna be able to help developers do more, bigger, better, faster, and we're gonna enable them to do things were never possible before.
Richard Davis (VP of Investor Relations)
Great. Well, thank you very much, John. Now let's move on to the Q&A session. You know, as with previous quarters, please raise your virtual hand, and we'll call on you, at which time, you know, unmute, obviously, unmute your microphone and turn on your video. I think the first question came from Matt Cost if we can pop him into the process here.
Matt Cost (Research Analyst)
Yeah. Hi, can you hear me?
Richard Davis (VP of Investor Relations)
Yep. Yep.
Matt Cost (Research Analyst)
Okay, great. Thanks for taking the question, everyone. I guess just 2 questions. The first one's on Create. I apologize if I misunderstood in the shareholder letter, there was a reference to the reason that Create decelerated and was down quarter-on-quarter having to do with strategic partnerships. I guess just to put it simply, what was lower inside of Create that caused it to decline quarter-on-quarter? I have one follow-up. Thank you.
Luis Visoso (SVP and CFO)
Yeah, Matt, what we tried to do in the shareholder letter is provide you a few numbers. 14% is the growth of Create, including strategic partnerships. As we said, we're looking at the businesses together. We also provide you perspective of what would Create be without strategic partnerships, and that's 17%. Then we explain to you why that number is a little bit lower than what we've seen in the past, and that's really driven by, you know, we're reducing our reliance on professional services as we drive digital twins. You know, we've talked about that, we're actually super excited about the launch of Industry, the Industry SKU, which will enable us to drive that business even faster. That's really the reason, Matt. I wanna make sure we're clear on a few points.
One is we're seeing a very low churn rate. It's actually improving over time, so that is not an issue at all, and we're seeing the pricing benefits exactly as we expected.
John Riccitiello (Executive Chairman, President, and CEO)
Let me add a little bit on that one. If you know, strategic side of the business, 17% growth. One of the reasons that number is just a little bit lower than it has been in previous quarters is frankly a simple issue of denominators and numerators. We now have Weta fully in the denominator in the base period, and we're still growing 17%. It'd be measurably higher without that in the base. The second thing is we've talked a lot about introducing ratable revenue streams associated with cloud, associated with AI services, et cetera. Those are yet to kick in. The new SKU is yet to kick in. Weta is finding new customers, which is a key part of Create. We're very optimistic.
you know, 17 standalone, the way we reported it, is a good quarter. We're excited about accelerating from here on the basis of all of the things that are coming in front of us in the next 2 quarters.
Matt Cost (Research Analyst)
Great. Thank you so much for that. Just the second one on Grow. I think you mentioned in the letter that you expect it to accelerate throughout the year. Are there any specific strategic initiatives that you would call out there? In particular, I'm curious about LevelPlay. Is that an area where you see the ability maybe to invest in, you know, signing up new customers up front to sort of gain market share?
Luis Visoso (SVP and CFO)
Yeah. Oh, your question is on Grow, Matt? Yeah.
Matt Cost (Research Analyst)
That's right. That's right.
Luis Visoso (SVP and CFO)
Yeah.
John Riccitiello (Executive Chairman, President, and CEO)
Let me take the top of that. I think we have a poor network today because I'm watching Luis break up a little bit today. Hope you're not seeing the same on your end. Look, strategic initiatives, one is the combination of IronSource and Unity has brought more data. More data has enhanced the performance of both networks. Earlier, I had mentioned that we were seeing synergies between Create and Grow, which we are, but we're also seeing strong synergy between what was the Unity Operate and is now Grow as IronSource and Unity networks work together.
A couple of really important ones, the strength we're getting out of neural networks, an AI tool and system we've been using for a couple years now on the Unity side is being applied network-wide. We're also seeing enhancements from what we're getting from great strengths and understanding of header bidding that is part of the IronSource, you know, historical technology stack. There's a whole bunch of initiatives, but the thing that's driving us right now are gains in mediation benefits as a result of increased quantum of data. Then technology transitions around the best of what IronSource used to do is now applied to the rest of Unity, and what Unity used to do is applied to that which was previously IronSource.
These are all growth drivers, and as we've mentioned, you know, we expect to see Q2, at least so far we feel very good about Q2 and the balance of the year, because these are driving market share gains for us. We are gaining in a market that's essentially, at this point, treading water, and we feel great about that. There's nothing about gaining market share that makes me feel any other way than great.
Luis Visoso (SVP and CFO)
Matt, these things that John mentioned are happening already now. We're not expecting them to happen in a few quarters. We're already starting to see the benefits, as John mentioned.
Parker Lane (Director)
Okay. Great. Thank you both.
John Riccitiello (Executive Chairman, President, and CEO)
Clark Lampen.
Clark Lampen (Managing Director)
Hi, guys. Can you hear me?
John Riccitiello (Executive Chairman, President, and CEO)
Yep.
Luis Visoso (SVP and CFO)
Yep.
Clark Lampen (Managing Director)
Okay, great. I wanted to follow up, John, on your comments around AI, and hopefully it won't sound, you know, sort of too myopic posing this question. At a point where AI technology is proliferating and sort of being adopted at a rapid rate and the velocity of development isn't really slowing down, what leaves you comfortable right now when it comes to the sort of potential for new entrants or threats to your position in the engine market? You know, if I could ask for maybe a sort of more specific point on product. Is there a timeline or have you guys thought about sort of releasing low or no-code versions of the product for lower-end developer segments in the market?
John Riccitiello (Executive Chairman, President, and CEO)
Couple of things. One observation is I think most professional game development and most professional digital twin development is gonna use a blend of deterministic tools and, you know, AI tools or natural language tools. Let me unpack that a little bit. It's possible that some of you out there have messed around with ChatGPT or you press, you know, you've messed around with some of the generative art tools that are out there. What you get sometimes is a first draft. You don't get, you know, the newspaper article you're gonna publish. You go back and forth between Word, the deterministic tool, and what you prompted and got from a natural language tool to synergize around what you think is an edited publishable product.
What happens in the Unity Editor is the character designers and the level designers and the animators and the lighting people and the physics people and the dialogue people, they work in concert to produce a product. What you will see us doing, and I mean this year in the near term, is introducing natural language interface within the editor to allow people to go back and forth between using a relatively complex tool that is deterministic, where they, you know, have to work with it to yield an outcome, and natural language, which will give them a first draft on what they're trying to do. In some cases, the deterministic tool will be easier to use.
If you're trying to create, apology for the development lesson here, but if you're trying to create something like volumetric fog, inside of a digital twin or inside of a game, you see all that atmospheric stuff that is so typical of movies and games, et cetera. Personally, I find it easier to take the sliders, 'cause I don't even know how to describe volumetric fog, how dense it should be, how viscous it should be, how reflective it should be, how rapidly it would be moving. A couple of sliders, you know, you get what you want. If I was trying to create another effect, it might be easier to start with something natural language. "I want a lion," or, you know, "I want a fence," or a house or a window or a door.
If it's in your inventory, that it's been built by the team that's working on the digital twin, "I want this particular manufacturing piece that we manufacture. I want it right here." That'll be much easier on a natural language interface, and I expect people to work back and forth. That was just one part of our advantage that I'd mention is that we're obviously by far the leading platform for this type of content creation, and what we expect is people to use both. Just using natural language is really almost impossible, and it's likely to be impossible for a very long time, to be able to create something that benefits from team production processes and get something that is consumer ready.
In addition to that, you can, we are definitely gonna build applications that lead to the Editor, connect to the Editor for people that are entirely non-technical, so they can use natural language to impact content inside the Editor. That is relatively easy for us to do. It's work well advanced, and I feel very good about that. That is net new users, and there's a large number of net users available to us. What I expect from this, and just looking at the Editor alone, one piece of what we're talking about, I expect to see more usage of the Editor by professionals, because they'll be more productive using the combination of deterministic and natural language tools. They can use that for scripting, C# scripting, for example, using Copilot and then edit inside of Unity.
The other side of this is new users coming to the platform, because the most prolific and most widely useful tool on the planet for professionals gets easier and easier to use for non-professionals or artists that just don't wanna interact with the developer's tool. We feel great about AI. I don't wanna take the next 45 minutes and speak to all of the points that I'd like to talk about and, you know, go through our roadmap. That's just tip of the iceberg, and it's positive.
Clark Lampen (Managing Director)
That's super helpful. If I could maybe, you know, sort of dovetail on the comments around the lower end of the market for a moment, maybe on pricing for Create. You guys just took price when I think the industry might have been at its weakest point, and it sounds like from a lot of our checks that there was basically no developer attrition. I think at a high level, that sort of suggests that the price-value relationship probably still sits in the developer's favor. I'm curious how you guys think about maybe striking more of a balance and then specifically addressing the low end of the market where a lot of your users are still unpaid.
Is that something that, you know, you guys would think about exploring over the course of the year, next year? Anything specific you could say on that front would be appreciated.
John Riccitiello (Executive Chairman, President, and CEO)
Yes, your observation is correct. We still have pricing, you know, flexibility. And we didn't get a lot of negative feedback when we took pricing recently around our, you know, new pricing approach for the editor across different classes of users. Here's what I would tell you is what I expect right now to go from here, how do we get paid? I'll use the game industry. We get paid because of our Grow business, which is the larger of the 2 businesses today, same customer is paying us. We get paid SaaS revenue on the tools today, we get paid for UGS, more usage. What I expect AI does is it causes a lot of workload in the cloud, a lot of workload on Unity's servers.
In addition to that, cloud services that we're building around Weta tools, for example, or others within the Unity tool, like Unity Toolplace, like SpeedTree, for example. I see a lot of opportunity for us to add ratable revenue as our developers start to use more AI tools and to build more complex and richer, more advanced worlds. What I expect, pricing will kick in later this year as our customers come off their prior contracts onto the new pricing level. That'll lift revenues in the balance of this year. Added cloud revenue for more usage. While I didn't speak to this yet, the runtime represents significant opportunity for us as well. Here we have an advantage. Almost all AI work that's cross-platform is gonna end up being done on the server side, and that's expensive for our customers.
We've announced Barracuda, which is a tool set that enables, an inference engine to be run on the handheld device or the computer or PC or console. We think there's opportunity in there. Of course, we want them to use our servers. That they can run local is a big advantage for Unity over all other alternatives for this type of AI work.
Clark Lampen (Managing Director)
Thanks a lot.
Richard Davis (VP of Investor Relations)
Great. Okay, we'll turn to Dylan Becker at William Blair.
Dylan Becker (Equity Research Analyst)
Yeah. Hey, guys, appreciate it. Maybe to give you another couple minutes on that AI pedestal and platform, John, and you called out the Barracuda piece. I wonder, are there any parallels that you guys can kinda call out as you've seen, again, creation tools moving from static 2D to interactive 3D, now embedding these within generative AI, maybe more personalized efforts and what that can mean for content delivery, but some of the lessons and learnings as you guys kind of already have led this transition in one form or the other?
John Riccitiello (Executive Chairman, President, and CEO)
Wow, I could talk about that for an hour, or more. Let me just make some observations. How do either the current art tools that are out there that allow you to do generative art or the large language models work? They study lots of examples for things, and then based on prompts, they give you a best fit or 5 best fits or 10 best fits that either represent an answer to what... You know, you ask for a girl on a bike in a wheat field in the style of Van Gogh, you get a picture of that. You describe a poem you want or a dialogue you want or a script you want.
It's not very hard to imagine, you know, for example, these models, both on the content side or the, the frames and art side and the dialogue side for bringing that together. If you look at a film, for example, you know, television and film is typically 20 frames a second, and it's not impossible, it's actually quite easy to scan every frame, scan the dialogue, scan the sound, you have to listen to it, you have to play it. In some future distant place, we're gonna see the possibility where you're gonna see not just the sort of the miserable examples of doctored, you know, video that's come out so far. You're gonna see, you know, some decent work that comes out of the film side.
The observation I would make for you here is games are really different. Games are very different. You know, if you're, Colin, if you're playing, you know, a game with me and you hit the X button to shoot me in the shoulder, we're playing a shooter, and I hit the triangle button and duck, but I duck just a little bit too late, I get winged in the shoulder, and I spin around, and I fall to the ground, and there's blood and all the rest of it that goes on in a video game. What's actually happening there is different than what you can scan.
You can scan that outcome, but what you need to be able to scan if you're gonna train on that is your input, my input, the frames and the sound, the physics and the lighting, and the code that drove the light and the physics, because those frames are never gonna be repeated again. They are unique to where you hit me. They are unique to the timing of you hitting the X button. They are unique to the timing of me hitting the triangle button. The challenge around this is where can you train to do that? Where can you train to create an outcome that advances content creation?
In the editor, I'm guessing a bunch of you haven't opened the editor, but were you to open the editor, you would see a screen that is your creation screen, where you're dragging and dropping and putting stuff up there. You'd see a runtime screen, which is how it would look if you provided those types of triangle and X inputs. That's a runtime screen. There's only one place you can train on that, inside the Unity Editor. You can read the code, you can read the runtime screen, you can read the input that the creator used. Content creation in the gaming world, where it's not the artifact can be scanned, it's happening in real time.
I have no doubt that pure natural language will be able to produce some really simple games, as long as enough rules are put into the tool to create it. The rich content that we've gotten used to, is going to be harder to train. It doesn't mean it won't get trained, but companies like Unity are going to be deeply involved in that process, and others are going to be outside looking in. I feel very confident in our position as Unity, where, you know, by way of example, in terms of third-party tools outside of Asia, you know, north of 70% of games are built in Unity. Our next largest Western competitor is less than 1%. We're in this position where we're the, if you will, the de facto tool for doing this kind of work.
As we bring these tools, these AI capabilities into the editor, I think we can win for our customers and win for ourselves. I think, though, that AI is going to have a profound effect on the industry. First, it's going to lead to inflection up in growth as game types are built that were not previously possible. Secondly, we're going to see, you know, I believe some of the crazy expense that goes on in some high-end production come down some. It's a favorable part for the game industry for growth, and I think it's going to be very favorable for Unity as we drive some of these changes through the industry.
Dylan Becker (Equity Research Analyst)
Got it. That I appreciate the depth of the answer there. Maybe one quick clarification one for Luis. On the financial side, looking at the balance sheet here, I guess thinking about capital allocation, I know you guys have the buyback in place. You've got about a $3 billion or roughly in converts out there. I guess, as we're ramping the margin profile, just kinda any thoughts on capital allocation? Thanks.
Luis Visoso (SVP and CFO)
Dylan, similar to what we talked last time, we were looking at the market. There is a credit crunch out there. We were happy with $1.6 billion that we have in the bank. We'll be generating cash this year. We wanna be very prudent. Don't expect anything dramatic there.
Dylan Becker (Equity Research Analyst)
Thanks, guys.
John Riccitiello (Executive Chairman, President, and CEO)
Okay. Yeah. Let's go to Gili at Goldman Sachs, please.
Gili Naftalovich (VP and Equity Research Analyst)
Hi, everyone. Thanks. Yeah, Gili Naftalovich. Congrats on the results, thanks for taking my question. I'll give you guys a break around AI, even though I agree with everybody on the call that it's very exciting and it's we're all waiting to tune into what you guys do. My question is more around the health of the industry or the non-gaming selling motion. Given that tight budgets and layoffs continue to be a common headline across industries in 1Q, any color you can provide around new business or renewal trends in that part of the business would be great.
John Riccitiello (Executive Chairman, President, and CEO)
You know, first off, we're really proud of our digital twin business and the new customers coming to our platform, you know, literally every week, and we've made a number of announcements. I wish more of them were further in the development process, 'cause we could show you the beautiful and incredible things that they're building. Again, we've made announcements in the shareholder letter, and they keep coming. You know, they come to us for a variety of things. You know, whether it's high-end watch companies around the manufacturing process or the marketing process, the auto industry around manufacturing process, large facilities, including cities like Orlando and airports, for terms of how to run safely and effectively in a large environment. You know, buildings, architecture, engineering, construction, also in the energy field.
Now, the fundamental advantage Unity brings versus most tools that are out there is that we're real-time. What that means is, instead of looking in the rearview mirror, you're looking at exactly where you are today. It's more of a like the dashboard of your car, which is another place Unity is increasingly used today in terms of displays in cars. You're looking at the present, and that is a huge advantage. A huge advantage, relative to the traditional companies that compete in the digital twin arena, which is why we're getting so much interest.
I have to admit, and I'm glad you asked the question, that when I greenlit the Barracuda project 5 years ago to be able to do this, I did not anticipate that we'd have a scale digital twin business in the way that we do, and I frankly didn't anticipate the actual use case. I thought AI on a, on a device was gonna be really, really cool, and I didn't. You know, me and my team and one of my colleagues, Silvio, that put this in place, he ran labs at the time, we knew there'd be something cool. We didn't know exactly what it is. I'm very glad we did it. This allows us to not look at the present. It allows us to run a massive amount of simulation in the cloud, but then run on device.
All of these people that work on the factory floor in a large auto company can anticipate what they should do next based on what's happening in the present, run simulation for lots of different scenarios. It can propose and advance the workflow in virtually any environment. I think that's actually gonna be a deciding point for digital twins going forward at a massive scale. Because right now what they do is they largely look backwards, and they try to come to their own intelligence and then change things. We're gonna be able and can use data in the present to help shape the future. I think that's always been the promise of digital twins. It's just a promise as of yet not delivered. Unity has the advantage of being able to do that on device.
You know, most digital twins today, you know, sadly, are constrained, you know, on a big manufacturing floor. The manager that's up in the booth overseeing, you know, thousands of people in a manufacturing facility. Where we're carrying this is it's on a device that every person on the factory floor has it and is using it to enhance what they're doing in the present. The guy in the factory, you know, overlooking the factory, that's the past. We're in the present, and as we bring AI to these people on the factory floor or in any other environment, they're looking into tomorrow. They're getting something better than they've ever had before. That's really an unlock of, I think, huge value.
The other angle of this is when I talk to customers on the digital twin side, they say, "You know, isn't that gonna give me a staggering phone bill?" In other words, aren't I gonna have to, you know, pay the various cloud providers in an enormous way? I read about OpenAI spending so much money on training their algorithms that it's frightening to imagine what the cost will be. We say, "Well, it might, but this allows you to run it on device." You know, having a large number of people that are training on device, on the cell phones or tablets or other things they're using to interact with this data, they can run it for free, and that's a big advantage. You know, we've all seen that you can aggregate a bunch of PCs to replicate a supercomputer.
This is a similar thesis. You can do things on device in a way that makes that load less expensive, and I think that's another competitive advantage for Unity, and we're unique in having built that. I feel great about this side of the business as well, and, you know, we're in the process of organizing for scaling on that side of the business, you'll see more about that in the course of the next weeks.
Richard Davis (VP of Investor Relations)
Great. Thank you very much.
John Riccitiello (Executive Chairman, President, and CEO)
Yeah.
Richard Davis (VP of Investor Relations)
We'll go to Stephen Ju at Credit Suisse.
Stephen Ju (Director)
All right, great. I wanna get us back on the AI train here. I just wanted to follow up on your comments, John.
John Riccitiello (Executive Chairman, President, and CEO)
I think we should have had this call run by ChatGPT for answering questions about AI.
Stephen Ju (Director)
Yeah. Yeah.
John Riccitiello (Executive Chairman, President, and CEO)
All right, Stephen, I'll give it back to you.
Stephen Ju (Director)
All right, around the Unity Editor, I get that we're not gonna get there all at once, but, you know, what you're describing here makes us want to think about the potential for a one-man game development company, with just the verbal prompts from the writer driving all the content creation. You know, it does sound like longer term this has the potential to increase the number of creators, but maybe also decrease the number of developers who can interact with Create. You know, versus sort of the historical 1.5 billion people that we have been thinking about, can you think about the puts and takes here? Thinking about this as just a positive, you know, net positive just seems too good to be true.
Also, you know, can you help us think about what this does for, you know, to your earlier commentary about digital twins and 3D content creation outside the game industry. You know, does this help you significantly expand the addressable market sooner? Maybe longer term, the puts and takes just inside the game sector maybe just does not matter. I guess, Luis, bringing us back down to earth a little bit.
John Riccitiello (Executive Chairman, President, and CEO)
Sure
Stephen Ju (Director)
... and the present, I think you recently announced a reduction in force, so, you know, can you talk about the dollar impact to OpEx and EBITDA for the year? Thank you.
John Riccitiello (Executive Chairman, President, and CEO)
I think that's the longest question we've had. For several quarters.
Stephen Ju (Director)
Yeah
John Riccitiello (Executive Chairman, President, and CEO)
Stephen, for that one. Puts and takes. First up, there are already lots of, you know, single-person game development organizations out there. You know, the Flappy Bird as an example, was made by 1 person, and some of the most successful, you know, sort of runner-type games, and puzzle games are built by 1, 2, sometimes 3 people. A lot of hyper-casual games are today built by 1, 2, or 3 people. That already exists as a phenomenon. They're pleasantly almost always using Unity, which is something we make, you know, we're very happy about.
The second thing is, once you get up from that, the single player, the single person making this stuff, my expectation, and you just need to think about it for a minute, is whether you're making a movie or a game or anything, the primary issue is whether you're successful or not. The revenue is supposed to exceed cost by a lot, and there, it's a very competitive market for high-quality product that's out there. I don't foresee a place or a time where an individual that is great at level design is likely to be great at character design, is likely to be great at animation or lighting or physics, or all of the things that yield balance in a game, et cetera.
That doesn't mean that a developer isn't gonna get a crisp choice here. I believe they will. Do I wanna make a game twice as good with the same number of people, or do I wanna make a game just as good with half the people? That is definitely gonna be a choice. How does that frame up against Unity? We're already on, you know, 2/3 of our revenue is from one level or another of usage of, you know, games, the play of games, the interactions on a server from games. As an observation, that's not necessarily bad for us. It might be good for us if that's where it goes.
The second thing I would tell you is I think that a lot of developers, I think, are gonna opt for the same number or more developers making better products because the prizes are huge. I think if you look at the marketplace today and say what entertainment products have ever generated $10 billion in revenue. In the first, I don't know, 25 things you'd come up with are all games. It is a very lucrative market for people to produce better and more differentiated product. The third thing is we've been talking a lot at Unity about, and with all of you, is a lot of our revenue that we see revenue growth in Unity is gonna come from cloud-based usage, how the tools are used, how the rendering works, how the build process works, and less than, you know, seats.
We believe most of our revenue and revenue growth from Unity is more around usage than it is around seats. The gaming side, I think you can do puts and takes, and you can have your own window on what you might think those things balance out to. I think they're pretty positive for Unity's revenue streams. Very positive, which is why we're confident enough in a world where this is all happening to raise our guidance and not lower it. The second part, on digital twins, this is an industry that is much larger than the game industry, you know, writ large, looking over the entirety of it, and we're uniquely positioned to deliver AI-enhanced runtime to enable real-time 3Ds that are driven, real-time simulation that's driven off device, which is a huge positive.
I can see nothing there if it's not just pure positive. Here, one of the reasons we built the usage-based platform, one is it solves a problem for our customers. Secondly, we anticipated that we wanted the majority of our revenue, if not almost the entirety of our revenue in time, to come from usage-based, not from seats. 'Cause we don't see, you know, a major, you know, luxury watch company having 50 developers and sustaining that. You know, they might have 50 watch designers, but they're not gonna have people doing like what they do in the game industry. You know, I don't see this as much, any other way than positive. I think it's positive short and long term.
Luis Visoso (SVP and CFO)
Hey, Stephen, to your second question, and thanks for inviting me to the conversation. We, you know, if you were to isolate this effect, it's about $18 million per full quarter.
John Riccitiello (Executive Chairman, President, and CEO)
Gotcha. Right. Thank you.
Luis Visoso (SVP and CFO)
Sure.
John Riccitiello (Executive Chairman, President, and CEO)
Okay, let's turn it over to Bernie McTernan.
Bernie McTernan (Senior Research Analyst)
Great. Thank you for taking my question. Again, sticking on AI, I think I know the answer, just wanted to clarify your point on it. Are there opportunities to upsell some of these capabilities, or is the goal to really make them more ubiquitous and continue to democratize the technology?
John Riccitiello (Executive Chairman, President, and CEO)
I didn't quite catch that question. I'm sorry, I had a blip in my network here.
Bernie McTernan (Senior Research Analyst)
Just all the different AI, different products that you're rolling out, do you think those about upsell opportunities or opportunities to charge more for your service, or is the goal just to continue to democratize the tools, and AI is just another example of that?
John Riccitiello (Executive Chairman, President, and CEO)
If I were to kind of do a quick listing, one is AI is already driving outperformance on our ad network. That's a positive. I think it is gonna democratize and bring more people into the tool set. We typically capture the majority of the developers and a smaller portion of the artists. Natural language will be artist into the tool, either from a web app approach I talked about before or directly into the editor using natural language. I think it's a positive there, and that I think fits under the notion of democratization.
Then the area I'm most excited about, one I think is probably the biggest growth driver for us, is the fact that our runtime, while it was a massively pervasive tool that's being, you know, used on 4 billion devices today, gets increasingly powerful to enable a gameplay or digital twins that are more advanced and maybe Gene Roddenberry saw it coming, but not many people did. I'm so excited about that. I think it's gonna drive users to our platform in a huge way, and it's uniquely ours, so I feel great about it.
Bernie McTernan (Senior Research Analyst)
Thank you.
John Riccitiello (Executive Chairman, President, and CEO)
Great. Parker Lane.
Parker Lane (Director)
Hey, guys. Can you hear me okay?
John Riccitiello (Executive Chairman, President, and CEO)
Yeah.
Luis Visoso (SVP and CFO)
Yeah.
Parker Lane (Director)
Perfect. John, I'll skip AI for this one. I wanna go back to last quarter's theme, which was synergies. You know, you just discussed it a little bit there, Luis. When we think about synergies in the context of the adjusted EBITDA ramp here, how far along are we in the identification and execution against the synergies, you know, post-IS?
John Riccitiello (Executive Chairman, President, and CEO)
How far along? 25%. I don't know. Okay, less than half. A lot more to go. I can say with no hesitation that it's driving revenue now. We didn't just add A plus B to get, you know, AB. We're getting more than we had in the combination, and that's mostly on the Grow side. We're also seeing the Create side enable revenue streams better on the Grow side, and we're seeing uptick in tool usage from Grow from the endorsement of Unity and from being part of the Editor. There are so many things I'd like to tell you about, but we tend not to describe what's gonna happen the day after tomorrow or the month after next.
There are some really substantial programs under development in Unity that will generate increased synergy for our customers and increased revenue for Unity because of the combination. Here's what I'll hold you to. Ask me in the December, I guess end of November, December call about synergies, because right now, I'm describing great performance today because of it with more to come. In December, that's gonna be a much more fun conversation to have based on work we have underway and product we have coming to market.
Parker Lane (Director)
Got it. I'll make sure to circle back later this year. If I could sneak one more in here on digital twins. I noticed you guys talked about reducing your reliance on professional services to drive adoption there. Can you just dive into that dynamic a little bit more and the implications of that and the go-to-market strategy?
John Riccitiello (Executive Chairman, President, and CEO)
Luis, you or me?
Luis Visoso (SVP and CFO)
Yeah, go ahead, John.
John Riccitiello (Executive Chairman, President, and CEO)
All right. First off, let me just describe the life cycle of a digital twin customer with Unity. The life cycle is, they usually start with what feels a bit like an RFP process, where they say, "I want a digital twin." They might even not call it a digital twin. "I want automation here. I want something that..." It always fits into our rubric of digital twins, which is, you know, bringing the physical world into a digital world, simulating that, driven by data, typically IoT data, significant real-time adjusted data, to yield an outcome for them. You know, the first innings are about scoping it. It's amazing how much science fiction these people have consumed, 'cause they've always got, you know, ideas that are amazingly ambitious. The next stage is building it.
This is where digital twin customers differ from game customers. When we talk to, you know, Activision or, you know, in Japan, to Square, or we talk to Ubisoft, or we talk to, you know, any of the major mobile publishers out there, you know, King, et cetera, and Zynga, they've already got an army of developers. They've typically got thousands of developers in their company using Unity. We're talking to them about what they might do next and adding to that. Inside of you know, the City of Orlando or the airports where we do business with, the car companies, they might have a couple dozen developers, but they don't have a lot.
What typically starts our relationship is a professional services agreement, where we build for them, with their people on our team, the first cut at that digital twin. As that digital twin gets built, it gives way to an ongoing, usage-based revenue stream from the cloud side of our business, where we ingest the digital twin data, the IoT data, in order to run that application for them. We always keep seats because they wanna be able to mess with it over time. When Luis said in the prepared remarks or in his response to 1 of the questions, "We want less reliance on professional services," you know, we never ambitioned or theorized that we were gonna grow our professional services business to a billion-dollar business someday.
It doesn't mean that it might not be there when Unity's, you know, a $15 billion company, but it's not how we saw this going. We've always seen this going where the lion's share of our digital twin business is cloud-based ratable revenue for operating the digital twin, not professional services revenue for creating the digital twin. Doesn't mean professional services goes away. It's still a growth line for us, but we're not emphasizing that as a growth vector, which is one of the reasons we've signed partnerships with people like Booz Allen and with Capgemini. We're very happy to allow them to do the building of that digital twin. You know, one, you know, Booz more in the government side of things, and, you know, Capgemini across a number of sectors. You know, energy is an example.
We're very happy to have these integrators work towards creating cloud-based high-margin revenue for Unity. What we see happening on the digital twin side is we have a lot of demand at the top of the funnel, and frankly, we have to turn away business at the top of the funnel, 'cause we don't intend to scale our professional services business as rapidly as we otherwise could. Getting our use cases out there and then shifting each one to ongoing ratable revenue, which, because it's fundamental to their workflows and fundamental to how they operate their businesses, they look, to me, like the closest thing to permanent revenue that I can see. I feel very good about this transformation.
Add AI to that, and you have the opportunity for more revenue on the ratable side, and secondly, greater and more positive differentiation versus traditional tools.
Parker Lane (Director)
Really great feedback. Thanks, John.
Richard Davis (VP of Investor Relations)
All right. Well, we've like in a football game or a hockey game where the Bruins lose in overtime, I had to throw in a Boston sports analogy. We've come to the end of this call. Thank you all so much. Thank you for your interest. Thank you for your very good questions. We really appreciate it. I'll turn it over to John to finish it up. We'll see you again soon, I'm sure.
John Riccitiello (Executive Chairman, President, and CEO)
All right. you know, thanks for sticking with us. you definitely beat my estimation on AI questions. I thought it was gonna be half the call. it didn't occur to me that it might be 3-quarters of the call. look, I feel very good about Unity. we had a great Q1. we're guiding for more great quarters for the balance of the year. We feel really good about our business. Because we're a platform, because we're generating such strong synergy, there is massive energy inside this company to serve our creators in ways that they haven't even imagined yet.
Part of that is AI, and I believe AI is gonna be positive for the industries we compete in, and it's gonna be positive for Unity's market share in those industries, and it's gonna be positive for the revenue that we yield from those market share point gains. We feel good about where we are, and thanks for your patience today. Appreciate all the good questions.
Luis Visoso (SVP and CFO)
Thank you, everyone.
Parker Lane (Director)
Thanks.
