Unity Software (U) shares experienced a dramatic increase of over 30% after the game engine company reported fourth-quarter results. While the company reported a 25% drop in revenue, bringing the total to $457 million, that still exceeded expectations. The results have been partly attributed to a “portfolio reset” involving business downsizing and layoffs.
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Turnaround in Progress
Unity Software Inc. is a tech company specializing in developing video game software. Its platform provides users with tools to create and monetize real-time 2D and 3D content, compatible with various devices, including mobile phones, PCs, and virtual reality devices. Although its primary application is in the gaming industry, the company’s solutions are also utilized in sectors such as architecture, construction, animation, and design.
The company reported a 25% year-over-year drop in fourth-quarter revenue to $457 million. The contribution from its strategic portfolio, which includes the engine, cloud, and monetization sectors, increased 4% year-over-year to $442 million. The Create Solutions division, impacted by the termination of a business agreement with Weta FX, saw a 47% decrease in revenue, down to $152 million. Despite this decrease, subscriptions saw a growth of 15%.
Unity’s annual performance for 2024 showed a 17% drop in year-over-year revenue, with $1.81 billion compared to $2.18 billion in 2023. This decline is attributed to Unity’s portfolio reset, the termination of the Weta FX agreement, and a decrease in Grow Solutions revenue. Despite the recent financial setbacks, Unity has managed to maintain positive free cash flow and a solid balance sheet, ending the year with over $1.5 billion in cash.
Further, to expand its customer base, Unity is setting its sights on non-gaming industries that require advanced 3D visualization software. This strategic move resulted in an impressive 50% increase in the company’s industry segment revenue, with significant new customers including Toyota and RTX.
Unity also launched ‘Vector,’ a self-learning AI platform that optimizes ad performance for better results. While this bold move is expected to be a slow but steady process, Unity remains optimistic about its potential impact.
Analysts are Cautiously Optimistic
Analysts following the company have responded favorably to the recent news. For instance, Morgan Stanley and Jefferies both raised their price target on shares of Unity, with Morgan Stanley increasing theirs from $26 to $32 while retaining an Overweight rating and Jefferies raising theirs from $23 to $28 while maintaining a Hold rating.
The impending roll-out of Unity’s new GPU-enabled ad algorithm, Vector, has been identified as a likely booster for the company’s ad business. The change could position Unity as a key player in GenAI/GPU by 2025, suggests Morgan Stanley. Jefferies also acknowledges the positive anticipation around Unity’s new Vector ad model.
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