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Unity Software Inc. (U)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue was $457.10M, down 25% year over year as Unity lapped 2023 one‑offs (Wētā FX termination, ironSource credits) but up 2.4% sequentially; adjusted EBITDA was $106.11M (23% margin), beating the top end of guidance by 26% as cost control and higher-than-expected revenue lifted profitability .
  • Strategic portfolio revenue grew 4% YoY to $442M as Create subscriptions rose 15% and Industry strategic revenue grew 50%; Grow delivered $305M, down 5% YoY but up 2% sequentially on seasonal demand and execution .
  • Q1 2025 guidance: revenue $405–$415M and adjusted EBITDA $60–$65M, reflecting prudence around the transition to “Unity Vector” (AI-driven ad platform) and normal seasonality; company moving to quarterly guidance in 2025 .
  • Management highlighted accelerating Unity 6 adoption (38% of active users upgraded; 2.8M downloads), deleveraging ($415M of debt repurchased in 2024) and intent to reduce stock-based compensation (SBC) expense by ~30% in 2025; near-term catalysts include Vector migration (iOS first, then Android) and subscription price increases rolling in across 2025–2026 .

What Went Well and What Went Wrong

  • What Went Well

    • “Meaningfully exceeded” revenue and profit expectations; adjusted EBITDA beat top end of guidance by 26%, with adjusted gross margin at 83% in 2024 and opex reductions supporting margin expansion .
    • Create momentum: subscriptions +15% YoY; Industry revenue +50% YoY; Unity 6 adoption at scale (38% of active users upgraded; 2.8M downloads) .
    • Cash generation and balance sheet: Q4 free cash flow $105.75M; year-end cash and equivalents $1.53B; reduced convertible notes by $415M in 2024 and subsequently priced $600M 2030 converts coupled with capped calls and repurchase of ~$644.3M of 2026 notes (post-quarter) .

  • What Went Wrong

    • Headline revenue declined 25% YoY to $457.10M; Create revenue fell 47% YoY (lap of ~$99M Wētā FX termination in Q4’23) and Grow declined 5% YoY (lap of ~$21M ironSource credits) .
    • Q1 2025 guide embeds a step-down vs Q4 on seasonality and anticipated disruption as ad models migrate to Vector; management flagged prudence on timing of revenue lift during the transition .
    • GAAP loss persisted (Q4 net loss $122.52M; −27% margin) despite improved operations, reflecting ongoing amortization, SBC, and restructuring expenses .

Financial Results

MetricQ4 2023Q3 2024Q4 2024
Revenue ($M)609.27 446.52 457.10
YoY change—−18.0% (calc vs 544.21 Q3’23) −25.0%
QoQ change——+2.4%
GAAP Net Loss ($M)(253.99) (124.55) (122.52)
GAAP EPS (Diluted)$(0.66) $(0.31) $(0.30)
Adjusted EBITDA ($M)185.64 91.72 106.11
Adjusted EBITDA Margin %30% 21% 23%
Cash from Operations ($M)72.10 122.36 112.19
Free Cash Flow ($M)60.74 115.21 105.75
Cash & Equivalents (End) ($M)1,604.27 1,415.97 1,527.88
Convertible Notes ($M)2,711.75 2,238.08 2,238.92

Segment revenue

Segment Revenue ($M)Q4 2023Q3 2024Q4 2024
Create Solutions (Total company)290 147 152
Grow Solutions (Total company)319 299 305
Strategic Portfolio Revenue423 429 442

Key KPIs (Q4 2024 unless noted)

KPIValue
Subscription revenue growth (YoY)+15%
Industry strategic revenue growth (YoY)+50%
Dollar-based net expansion (DBNE)96%
Customers >$100K1,254
Unity 6: active users upgraded~38%
Unity 6 downloads2.8M

Non-GAAP adjustments

  • Adjusted EBITDA excludes SBC, amortization of intangibles, depreciation, restructuring, interest, taxes, and other non-operating items; adjusted gross margin was 83% in 2024 (vs 82% in 2023) .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent/ActualChange
Strategic Portfolio Revenue ($M)Q4 2024$422–$427 $442 Beat (>$15 above high end)
Adjusted EBITDA ($M)Q4 2024$79–$84 $106.11 Beat (26% above top end)
Total Revenue ($M)Q1 2025—$405–$415 New quarterly guidance
Adjusted EBITDA ($M)Q1 2025—$60–$65 New quarterly guidance
Non-strategic portfolio revenue ($M)FY 2025—~30 for full year Expected baseline
Guidance cadence2025Annual previouslyQuarterly going forward Policy change

Drivers/notes: Q1 outlook reflects Vector migration prudence, seasonal step-down from Q4, and incremental cloud costs for model training .

Earnings Call Themes & Trends

TopicQ2 2024 (Q-2)Q3 2024 (Q-1)Q4 2024 (Current)Trend
AI/Ad tech rebuild (Vector)Announced fundamental rebuild of ML/data stack to drive ad ROI Live-data testing underway; iterative validation; dual-run old/new models Vector migration begins end-Q1’25; phase 1 done by end-Q2’25; iOS first, then Android; conversion → user value → bidding models Execution advancing; productization
Create pricing/subscriptionsDouble-digit Create subscription growth expected; prior price increases flowing; Industry strong Create subs +12% YoY; Unity 6 launched; pricing changes set from 1/1/25 Create subs +15% YoY; price hikes to roll across 2025–2026; Plus→Pro migration benefit Improving, pricing tailwinds pending
Industry (non-gaming)Industries +59% YoY; growing logos and SI/VAR strategy Fastest-growing subscription business; new logos (KLM, Deutsche Bahn) Industry +50% YoY; added Toyota HMI partnership (announced Feb 6) Sustained outperformance
Profitability/costsNon-GAAP opex down 21%; adj. EBITDA margin 25% Adj. EBITDA beat; free cash flow strong Adj. EBITDA beat; focus on deleveraging; SBC expense to fall ~30% in 2025 Margin discipline maintained
Guidance postureLowered FY’24 strategic portfolio guidance; cautious Grow recovery timeline Raised FY’24 strategic portfolio and adj. EBITDA guidance Shift to quarterly guidance in 2025; prudent Q1 outlook More conservative/transparent cadence

Management Commentary

  • Strategy and execution: “Unity's results in the fourth quarter reflect real progress, meaningfully exceeding our guidance for both revenues and adjusted EBITDA... we’re here to spark rapid, sustained, long-term growth.”
  • Vector intent and cadence: “Migration begins towards the end of Q1 with this first phase... complete by the end of Q2 2025... able to adapt in real time... we won’t see the benefits immediately. The caution in our Q1 guide reflects [this].”
  • Create momentum: “Customers have responded immediately to the cancellation of the runtime fee and the launch of Unity 6... 15% year-over-year increase in subscription revenues... nearly 38% of our active users have already upgraded.”
  • Capital allocation: “We plan to focus R&D to the highest impact... complement revenue growth with ongoing margin expansion... gradually delever... SBC expense is expected to fall by 30% in 2025.”

Q&A Highlights

  • Guide step-down and Vector: Management emphasized prudence regarding the timing of revenue lift during the ad stack migration; primary driver of Q1 guide softness alongside normal seasonality .
  • Create growth drivers: Subscription growth driven by prior price actions, Plus→Pro migrations, and renewed customer engagement post-runtime fee cancellation; 2025–2026 will see ratable flow-through of new price increases .
  • Industry pipeline/competitiveness: Focused on auto, retail, manufacturing; combining strong “pull” adoption with expanded SI/VAR partnerships to scale large enterprise deals .
  • Rollout mechanics: Vector rollout hits iOS first, then Android; initial focus on conversion models, with subsequent emphasis on user value matching and bidding efficiency .
  • Financial model: High-80s adjusted gross margin business with operating leverage; near term investing in cloud/model costs, but confident in medium-term margin expansion with growth .

Estimates Context

  • Wall Street consensus from S&P Global could not be retrieved due to an API limit during this session; therefore, versus-consensus comparisons are unavailable at this time. As an alternative context, Unity reported that Q4 adjusted EBITDA exceeded the top end of its guidance range by 26% and strategic portfolio revenue exceeded the high end by ~$15M .
  • If you would like, I can refresh S&P Global consensus for Q4 actuals vs consensus and Q1 guidance vs consensus once access permits and append the table.

Key Takeaways for Investors

  • Vector transition is the near-term stock driver: Q1 guide prudence and any early telemetry (iOS first, Android next; conversion→value→bidding sequence) will steer sentiment on Grow’s recovery trajectory .
  • Create has visible multi-quarter tailwinds: subscription price increases roll through 2025–2026; Unity 6 adoption (38% upgraded) and Plus→Pro migrations support sustained subscription growth .
  • Mix shift and cost control underpin margins: adj. EBITDA margin at 23% in Q4 with room to expand as revenue accelerates; 2025 SBC expense planned down ~30% offers per-share leverage .
  • Industry segment is structurally strong: 50% YoY growth and high-profile wins (e.g., Toyota HMI) support a non-gaming growth vector less tied to mobile ad cycles .
  • Balance sheet flexibility: $1.53B cash at year-end 2024 and active debt management (post-quarter $600M 2030 converts with concurrent repurchase of ~$644.3M 2026 notes) reduce refinancing risk and may lower dilution via capped calls .
  • Watch disclosures cadence: shift to quarterly guidance enhances near-term transparency; re-baselining of non-strategic portfolio (~$30M FY25) simplifies the model .
  • Trading implication: near term, stock likely reacts to Vector execution signals and ad spend seasonality; medium term, combination of Create pricing tailwinds and Vector-driven ad competitiveness could re-accelerate total revenue and expand margins if milestones are met .