Got interested in this company after its huge acceleration of rev growth after IPO. Took initial small position to evaluate further. Here is a whole bunch of raw notes from my research.
Last 3 Qs:
Revenue Growth 35% → 42% → 53%
Create Rev Growth 24% → 38% → 47%
Operate Rev Growth 53% → 62% → 71%
NRR 133% → 142% → 144%
Not a gaming company - a gaming PLATFORM.
Dominate platform for creating & monetizing mobile games.
Gaming is land (Create) and expand (Operate).
Leader in AR/VR [… but is still nascent].
Expanding out of just gaming, to industry-based solutions (film/tv, auto, architecture, marketing). [Only 8% of high end custs so far.]
Operate segment is usage-based or rev-share. [Mostly driven by ads.]
One of only pure plays on Metaverse digital worlds.
Drives many multiplayer games, even ones built off platform.
Sticky platform - difficult to switch.
Duopoly vs clear leader (Unity vs Unreal).
Common industry perception is “Unity for ease, Unreal for quality”.
Clear COVID bump [… but what happens to mobile from here? I feel that “return to normalcy” might affect PC/console more than mobile, plus COVID may help give AR/VR a needed kickstart.]
Operate is gaming only; needs more “usage-based” on non-gaming clients. [Forma, just released Dec-20, starts to expand this.]
Create segment is seat-based, doesn’t scale.
Very muted guidance gives pause, after prior Q4s always gave clear 20%+ seq bumps.
Will be clear winner now with mobile, and going forward with VR/AR and metaverse. But lots of moving parts with this company, and future after COVID is unclear, so need to see how the next few Qs play out before moving this up in conviction. For now it’s at the ‘barely in my port’ stage.
Criticism, thoughts, insights greatly appreciated!
Platform for interactive real-time 3D content (RT3D). Set of solutions to create, run and monetize interactive 2D/3D content.
A bit like Coupa and Elastic - built a platform with engines/libraries/SDKs, exploits partners to extend it in 3rd-party ways, and acquires the better ones to expand platform.
- Game developers & architects
- Architecture Engineering Construction (AEC)
- Auto designers, manufacturing
- Film/TV makers and animators
- Brand creatives
- 2D/3D real-time content
- mobile, tablet, PCs, consoles
53%+ of all mobile games
1800+ R&D team
Downloaded more than 5B times per month in 2020
- Unreal Engine (Epic Games / Tencent), esp for high end console/PC games
- Valve Source 2
- Godot 2D/3D engine (open source)
- … wide variety of small mobile frameworks
Mobile = League of Legends, Hearthstone, Age of Magic, War Robots, Jurassic World Alive, Arena of Valor (Tencent), Honor of Kings (Tencent), Warlords of Aternum, Guns of Boom, Last Day on Earth, Tacticool, Royal Blood, Monument Valley, Flappy Bird, Crossy Road
PC/Console = In the Valley of Gods, Ori and the Will of the Wisps, Oddworld: Soulstorm
AR/VR = Beat Sabre (VR), Pokemon Go (Mobile AR), Dr Grordbort’s Invaders (Magic Leap AR)
Blizzard, Volvo, Skansa, Baobab Studios
1.5M monthly active creators, in 190 countries
3B monthly downloads to 1.5B unique devices
Based in SF, w/ 44 offices w/in 16 countries
- tools for content creators
- priced per-seat, per month
- 3 pricing tiers - Plus, Pro, Enterprise
- platform services to grow and engage user base
- can be used in any game, not just created in Unity
- enables monetization via ads, in-app purchases
- other tools like engagement analytics, multiplay, P2P communications
- priced via revenue-share (take rate) or usage-based
- Powers 53% of top 1000 mobile games on Apple/Google
- Over 50% of all games (PC, console, mobile)
- 93 of top 100 game dev studios are custs
- 1.5M monthly active creators
- Pro users actively use - 4.9h/day in FY19, 5.1h/day in FY20
- 716 custs w/ TTM ARR >$100K, avg ACV $190.5K
- Owns 40 US patents, 8 int’l patents, 79 applications
Platform captures and analyzes end-user behavior and app performance data ; ~ >50B in-app events per day across 20 diff platforms.
US 24.4%, EMEA 37.6%, China 13.5%, APAC 18.5%, Other Americas 6.0%
EMEA and China both grew ~300bps YoY, US shrank
Used by 53% of top 1K mobile games
Used by 50% of games across platforms
Used by 93 of top 100 largest game studios by revenue
CEO Riccitiello brought in in late-2014, ex Electronic Arts
2019 Revenue 541M +42%
- Operate Revenue +59%
Custs>100K are 74% of revenue
$NER rising 133% → 142%!!!
TAM 29B (Gaming 12B + Other 17B)
Epic Game’s Unreal Engine
1.5M creators per month used it
1.5B devices per month download content
Other markets beyond gaming
- Skanska (one of world’s largest construction company) going interior mockups, 2D/3D logistics.
- Volvo has 30+ creators using for R&D, design and marketing.
- Filmmakers an use to make virtual characters w/o motion capture. Disney used to shoot Lion King.
- HK Airport used to design buildings & plan complex scenarios & simulations.
“Metaverse” - highly immersive virtual world powering real-world interactions
… worlds like Fortnite, Minecraft, Roblox
Set of features to build games quickly and efficiently. Supports all platforms: IOS, Android, Windows, Mac, Linux, PS4, XboxOne, Oculus, PSVR, tvOS, AndroidTV, ARCore, MagicLeap, MS HoloLens.
Upfront subscription cost over 1-3yr terms. Personal and Student plans are free, or pricing tiers Plus, Pro and Enterprise at $399, $1800, $2400/yr/seat.
- Unity Pro
- Unity Enterprise
- Unity Plus
- Unity Personal
- Unity Student
- Art Engine
- MARS (Mixed & Augmented Reality Studio)
Priced on usage-based and revenue-share, to allow developers to grow, engage and montetize their user base.
- Personalized Ads
- Contextual Ads
- Unity Ads - ad network for mobile games
- Unity IAP (in-app purchases) - sell digital items or upgrades in-game
- DeltaDNA - player behavior analytics
- Multiplay - multiplayer games
- Build Server
- Vivox - voice or text chat
- Cloud CDN
In general, Unreal thought of as high-end of market, Unity as low-end. [Not sure that is true, but do know Unreal is the ‘better fidelity’ option if going for hyper-realistic.] Unity owns mobile, but is moving towards Unreal by improving 2D/3D engines. Now powers AR/VR games, like Pokemon Go, Jurassic World Alive.
S-1 Breakdown from Macro Ops
- Invest in product innovation
- Grow existing gaming custs
- Grow new gaming custs
- Grow beyond gaming
- Grow across global markets
S-1 Review by Aaron Bush @ Master the Meta:
- 22 diff products – 50% gaming focused, 35% agnostic, 15% non-gaming
- growth through vertical integration
- new frontiers in AR/VR, AI, non-gaming
- 50% marketshare, $542M rev in 2019 seems like a low take rate for value added
- 50% of revenue going back into R&D, from 56% of workforce
- 60% of revenue is from Operate, likely mostly ads
… will Apple’s IDFA plans pose a threat? unknown
Opportunities in Create side for better, scalable monetization, esp non-gaming.
For gaming, Create + Operate segments are land and expand.
Majority of custs use Create’s free tier.
55% of custs>100K use both Create & Operate (seems low).
Only 8% of custs>100K are non-gaming.
Common industry perception is “Unity for ease, Unreal for quality”.
Majority of Operate is ads; deltaDNA & Vivox are <10% of revenue.
Unreal added live services offering (no ads yet).
Working on ad solutions in AR/VR.
- Non-gaming needs to hit land-and-expand. Can Unity build Operate products for non-gaming.
- Create cannot scale with per-seat fixed cost.
- Unreal doesn’t charge, instead has royalty-based model. As of v5, it is free to license until $1M in revenue, then 5% royalty fee.
Unity Deep Dive (Value Hive podcast w/ Aaron Bush, 9/18/20)
Unity deep dive (Chit Chat Money deep dive, 10/1/20)
CEO joined 2014, was from UA.
Creator focus in mission and mgmt.
Sexual harassment suit against CEO - Unity is denying and defending. HR head was involved, no longer there.
Mgmt/Insiders 16.7% ownership, Sequoia Capital & Silverlake 38%
Difficult to switch platform
Sticky w/ services
AEC - Partnering w/ AutoDesk - good for AEC market
Automakers - used heavily across company, architecture, design, marketing
Film industry - replaces green screen and live-motion
The Mandelorian used Unreal Engine, change scene/background in real-time
Unreal Engine changed pricing
You don’t pay for it until $1M in game revenue
Pickaxes for metaverse
Developers going to be sticky
next 2 years will see new Xbox, Playstation, SwitchPro
higher end systems,
60% is in operate, adjacent markets outside gaming aren’t using that
Duolopy w/ Unreal Engine (not top dog??)
Chit Chat Money - Chris Seifel on Unity (Dec-20)
Used for >50% of mobile and 60% of AR/VR games
Short term - Gaming monetization
Mid-term - AR/VR, gaming and other
Long-term - Metaverse
Duopoly, difficult to switch
Metaverse will start in mobile?
Unreal is C++, Unity is C#
Roblox is no-code environ
CEO from COO/President of EA, owns 11%
Resigned EA over performance after a lot of M&A acq
Tried to acquire TakeTwo at EA
Joined board in 2013, CEO in 2014
Sexual harrassment lawsuit against CEO from VP of Recruitment after she was fired
Pivoted Unity away from just gaming
Not going towards royalty rate like Unreal
Moat - difficult to switch, mobile & AR/VAR leader
Want to see better monetization
Invest Like the Best Podcast
Matthew Ball - The Future of Media: Movies, the Metaverse, and More
Gavin Baker - on Metaverse
39:47 - 46:13
- Metaverse = connected virtual worlds that people will spend a massive amount of time in
- AR/VR likely to be the interface, why Facebook bought Oculus
- Video games are becoming a social platform
- Roblox and Fortnite starting to become this, hosting social events
Unreal vs Unity
Both have great 3D, Unreal best fidelity
Both have 2D, Unity has larger focus & tool-set
Unity has better VR
Both do AR but Unity more mature
Both do multiplayer, Unreal integrated, Unity coming
Unity has better mobile
Unreal Engine 5 licensing change (May 2020)
Pricing was 5% royalty on engine
Now no royalties on first $1M of revenue, then 5%
Games in the Epic Store are 12% flat royalty (no engine)
Epic Online Services released - free suite of tools to enable multiplayer features – in-game friend lists, matchmaking, lobbies, etc.
Unity vs Epic from S-1
8B hours of gameplay per month
1.5M active creators per month
8k apps/games each month, over last 6mo
716 custs >100K TTM ARR
… 60 of those outside gaming