Unity (U): A primer for 11/9 earnings

Unity reports after market close tomorrow.

I first learned about Unity (U) when Beth Kindig wrote about it. I/O Fund did not take a position at the time (actually they did, but exited quickly under the auspices they were too early) but I did.

A reminder of their moat: A dominant position in the mobile gaming industry with over 60% of worldwide AR/VR games created on Unity platform. When you become a client, you undergo a 750 hour (sic) study program to learn. So there is a barrier to switching. But this isn’t a gaming stock in the sense of your kid sitting on the couch

This is an AR/VR play. As of 2020, they had 94 of the Top 100 game development studios as clients and if that scares you because it makes you worry that they’ve already BigFoot-printed their TAM, it’s not ALL about studios as they emphasize that they have over 3.4B monthly users, many of whom are independent “artists” that have no studio affiliation. In addition and this is exciting to me and something I’ll be listening for on the call their platform has applications for architecture, engineering, construction, automotive, and film where they are growing a customer base.

What did they report in Q2 that kept me interested:
Earnings beat of 11% (6-7.5% is typical for them) for sequential growth 16%
FY growth 48.4% and accelerating (40.1% and 39.3% y/y for q1-2021 and q4-2020 respectively)
Gross margins 79.1%
3.4B monthly active users
Raised FY revenue guidance to $1.045-1.060B (+35-37% y/y)

What are they guiding for q3
Revenue $260-265M (29-32% y/y) in a tough comparative quarter (q3 2020 had high numbers of people shelter in place). This would obviously be a slow down sequentially

What I think would be acceptable for q3
Revenue of $287 would be a 8.3% beat on their guidance, a 4.9% sequential rise, and 43% y/y growth.

What would thrill me for q3
Revenue of $291 which would be +6.4% sequentially, 44.9% y/y and a 11% beat on their guidance which is the same as last quarter
Another FY revenue raise
Accelerating ‘create’ segment which is recurring revenue and represented 30% of their revenue in 2020
Customer growth in non-gaming segments

4% position in my portfolio