What Happened?
Shares of game engine maker Unity (NYSE:U) jumped 25.3% in the afternoon session after the company reported impressive fourth-quarter earnings, which blew past analysts' revenue, EPS, and EBITDA expectations. However, revenue declined 25% year-on-year due to a portfolio reset (to focus on its core operations), with Create Solutions revenue plunging 47% and Grow Solutions revenue slipping 5%. Looking ahead, its revenue and EBITDA guidance for the next quarter fell well short of Wall Street's estimates. Still, this was a decent quarter, masked by the short-term impact of some business updates, including the new pricing model announced in 2024.
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What The Market Is Telling Us
Unity’s shares are extremely volatile and have had 37 moves greater than 5% over the last year. But moves this big are rare even for Unity and indicate this news significantly impacted the market’s perception of the business.
The biggest move we wrote about over the last year was 12 months ago when the stock dropped 19.1% on the news that the company reported fourth-quarter results with full-year 2024 revenue and EPS guidance falling short of analysts' estimates. Although this quarter's headline revenue beat, Unity stated it benefited from a unique event where one of its customers, Wētā, terminated its service agreement and opted for a perpetual license to access its software. This resulted in a one-time revenue boost of $99 million - without this sale, Unity's revenue would have been $510 million, dropping 2% year on year.
In its shareholder letter, James Whitehurst, the company's recently appointed CEO (October 2023), also shared Unity's new strategy. The company's reset will be split into two phases, the first being to focus on its core business by narrowing its investments. Unity also intends to right-size its cost structure, as seen in its January 8th layoff of 25% of its workforce. Phase one is expected to finish by the end of Q1, and once Unity's leaner cost base is established, it plans to return to growth initiatives and new product development. Overall, this was a mediocre quarter for Unity, and investors are likely uncomfortable with the company's outlook.
Unity is up 12.1% since the beginning of the year, but at $27.47 per share, it is still trading 16.9% below its 52-week high of $33.04 from February 2024. Investors who bought $1,000 worth of Unity’s shares at the IPO in September 2020 would now be looking at an investment worth $401.90.
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