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Unity Software Inc
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Welcome to Unity’s First Quarter 2023 Earnings Call. After the closing of the market today, we issued our shareholders letter, the material is now available on our investor website at investors.unity.com.
Today, I am joined by John Riccitiello, our CEO, President and Chairman; and by Luis Visoso, our CFO.
Now before we begin, I want to note that today’s discussion contains forward-looking statements, including statements about goals, business outlook, industry trends, market opportunities, expectations for future financial performance and similar items, all of which are subject to risks, uncertainties and assumptions.
You can find more information about these risks and uncertainties in the Risk Factors section of our filings at sec.gov. Actual results may vary and we take no obligation to revise or update any forward-looking statements.
As in prior quarters, we are providing both GAAP and non-GAAP financial measures. And unless otherwise noted, we will be speaking to the non-GAAP financial measures when describing our results. The shareholder letter and our filings on sec.gov provide full GAAP to non-GAAP reconciliations.
Okay. Great. Thank you. So first let me turn the call over to John for just some brief highlights of our results. John?
So look we are very pleased with our Q1 results and happy about our guide. And I want to start by just thanking all of our colleagues at Unity, they have done a fantastic job to get us off to a great start in 2023.
Now I have to say that our results, these strong numbers reflect great synergy between our two main businesses, Create and Grow. We are a true platform. And by platform, what I really mean is that our customers get every day from us something that is more than the sum of the parts.
They get more value than they would from individual products and that’s being proven truer and truer by the day. And it’s from this that our customers win and Unity wins. Now all of this allows us to put Unity and a place where we can serve our creators in a great way and to be on a strong path towards continued profitable growth.
Now I think it’s obvious that there is a subject that’s on everybody’s mind. It’s certainly every other question you read or every press article, AI. And I know you saw in our shareholder letter, a long conversation about AI.
And I have to tell you, I am excited about it. We have been working on it for several years at Unity. We have got the advanced products that we have been deploying for years now and more coming and we have announced a number of beta products.
But here I want to make a couple of key points so it’s not lost. First, I think, AI is positive for our industry and positive for our creators. Second, Unity has sustainable competitive advantages in and around AI, not just because of what we are building in AI because of the very nature of our platform.
The very nature of our platform will benefit from AI tools and content creation and we are uniquely able to enable creators to make things where worlds come alive or digital twins coming live and waste were never possible for. These things to us seem like a strong tailwind in quarters and years to come and we couldn’t be more excited about our future.
So, thank you, everyone, and thanks for being here.
Great, John. So like always, we are going to open up the call in just a bit, but maybe to get things rolling, let me kick off the question-and-answer session with like a couple of questions that are on investor’s minds. The first one would be for Luis. And look, with a strong first quarter in the books, how does the balance of the year look?
Hey. Thank you, Richard. You are right. It was a strong first quarter. And frankly, as John said, it was driven by strong execution by the Unity team. We beat the high end of the revenue guide by $20 million. We beat the high end of the EBITDA guide by $20 million as well. And if you compare this to the first quarter of 2022, that’s a $55 million EBITDA improvement.
We are also pleased with the Unity and ironSource integration. The teams are working very well together and we are starting to share and reapply best practices between teams and we believe that we are performing better than the market. So, yes, it was a very good first quarter.
But back to your question, so how does the balance of the year look? Well, we expect growth and profitability to accelerate throughout the year. We are guiding Q2 above consensus for both revenue and EBITDA. And for the full year, we are being prudent, I mean, we all read the same news and the economic environment is still volatile and uncertain.
So what we did is we raised the low end of the revenue guide by $30 million and we raised the low end of the EBITDA guide by $20 million and we expect to continue to perform better than the market. And while you did not ask, we are still committed to our $1 billion EBITDA run rate by the end of 2024. So, with that, I will turn it back to you, Richard.
Great. And then John, you did touch on it a bit in your introduction kind of summary. But maybe if you just unpack a little bit, discuss how kind of Unity sees the emergence of tools and platforms? And then we will open it up to a full Q&A for everyone.
Sure. So, in general, at least as I see it, AI in the world we live in, we real-time 3D has some important provable points. In general, I think, you could break it down to two ideas. What you can do with the Editor and what you can do in content creation, it’s going to be faster and cheaper.
So developers will do more on our platform and that applies to the game development side and the digital twin side. We are seeing a lot of interest in our platform and part of that is because of AI.
We have always seen that interest is strong, obviously, our shares are very strong across the Board. So it’s developers embracing AI to produce better content, faster, better, cheaper. That’s always a good thing in our world.
The second aspect of this is that, they can do things that were never before possible. And this is where it gets really exciting. It’s when non-player characters and games speak to you like they do in a ChatGPT, they are intelligent.
They have ambitions. They are not just scripted dialogues from a writer and their actions also are freer. And what that results heat, I think, is worlds to the gaming side, they are going to be so compelling that it’s going to drive an inflection point in growth in gaming.
The second aspect of this is that same idea applies to digital twins and we have always felt that real-time digital twins was a big advantage. Real-time makes a difference. What we get to now is AI-enhanced real-time and we wrote about that in our shareholder letter.
What that gives you is, a digital twin, which is just not catching you up to the moment, but helping you do next, what is necessary to run your factory better, to design a better building, to teach people in a better way, to run a better airport or at least a smarter airport, all the things people are using us for now gets better, faster and more future looking in a way that really enhances their business.
So we feel great about AI. We are going to be able to help developers do more bigger, better, faster and we are going to enable them to do things were never possible before.
Great. Well, thank you very much, John. So now let’s move on to the Q&A session. As with previous quarters, remember, please raise your virtual hand and we will call on you at which time unmute, obviously, unmute your microphone and turn on your video. And I think the first question came from Matt Cost, if we can pin him into the process here.
Yeah. Hi. Can you hear me?
Yeah. Yeah.
Okay. Great. Thanks for taking the question, everyone. So I guess just two questions. The first one is on Create, and I apologize if I misunderstood in the shareholder letter, but there was a reference to the reason that Create decelerated and was down quarter-on-quarter having to do with strategic partnerships. But I guess just to put it simply, what was lower inside of Create that cause it to decline quarter-on-quarter? And then I have one follow-up. Thank you.
Yeah. Matt, what we tried to do in the shareholder letter is provide you a few numbers. So 14% is the growth of Create, including strategic partnerships. As we said, we are looking at the businesses together. But we also provide you a perspective of what would Create be the without partnerships and that 17%.
And then we explained to you why that number is a little bit lower than what we have seen in the past and that’s really driven by we are reducing our reliance on Professional Services as we drive digital twins. We have talked about that and we are actually super excited about the launch of industry -- the industry SKU, which will enable us to drive that business even faster.
So that’s really the reason, Matt. I want to make sure we are clear on a few points. One is we are seeing a very low churn rate. It’s actually improving over time. So that is not an issue at all and we are seeing the pricing benefits exactly as we expected.
Let me add a little bit on that one. So if you -- ex-strategic side of the business 17% growth. One of the reason that number is just a little bit lower than it has been in previous quarters is, frankly, a simple issue of denominators and numerators. So we now have what are fully in the denominator in the base period and we are still growing 17%. It would be measurably higher without that in the base.
The second thing is we have talked a lot about introducing ratable revenue streams associated with cloud, associated with AI service, et cetera, those are yet to kick in. The new SKU is yet to kick in, whether you find a new customers, which is a key part of Create.
So we are very optimistic. 17% standalone the way we reported is a good quarter. We are excited about accelerating from here on the basis of all the things that are coming in front of us in the next couple of quarters.
Great. Thank you so much for that. And then just a second one on Grow. I think you mentioned in the letter that you expected to accelerate throughout the year. Are there any specific strategic initiatives that you would call out there? And in particular, I am curious about LevelPlay. Is that an area where you see the ability maybe to invest in signing up new customers upfront to sort of gain market share?
Yeah. Your question is on Grow, Matt?
Yeah.
That’s right.
Yeah.
Let me take the top of that. I think we have a poor network today, because I am watching Luis break up a little bit today, hopefully you are not seeing the same on year-end. Look, strategic initiatives. One is the combination of ironSource and Unity has brought more data, more data is enhanced the performance of both networks.
Earlier, I had mentioned that we were seeing synergies between Create and Grow, which we are. But we are also seeing synergy between what was the Unity operate and is now Grow as ironSource and Unity networks work together. A couple of really important ones.
The strength we are getting out of neural networks, an AI tool and the system we have been using for a couple of years now on the Unity side is being applied network-wide. And we are also seeing enhancements from what we are getting from great strengths and understanding of header bidding that is part of the ironSource historical technology stack.
So there’s a whole bunch of initiatives, but the thing that’s driving us right now were gains in mediation, benefits as a result of increased onto data and then technology transitions around the best of what ironSource used to do is now applied to the rest of Unity and what Unity used to do is applied to that, which was previously ironSource.
These are all growth drivers, and as we have mentioned, we expect to see Q2 at least so far, we feel very good about Q2 and the balance of the year, because these are driving market share gains for us. We are gaining in a market that’s essentially at this point, treading water and we feel great about that. There’s nothing about gaining market share that makes me feel any other way than great.
And Matt, these things that John mentioned are happening already now. We are not expecting them to happen in a few quarters. We are already starting to see the benefits, as John mentioned.
Okay. Great. Thank you, both.
Clark Lampen.
Hi, guys. Can you hear me?
Yeah.
Yeah.
Okay. Great. I wanted to follow up, John, on your comments around AI, and hopefully, it won’t sound sort of too myopic posing this question. But at a point where AI technology is proliferating and sort of being adopted at a rapid rate and the velocity of development isn’t really slowing down. what leaves you comfortable right now when it comes to the sort of potential for new entrants or threats to your position in the engine market? And if I could ask for maybe a sort of more specific point on product, is there a time line or have you guys thought about sort of releasing low or no code versions of the product for lower end developer segments in the market?
So a couple of things. So one observation is, I think, most professional game development in both professional digital twin development, is going to use a blend of deterministic tools and AI tools or natural language tools.
Let me unpack that a little bit. It’s possible that somebody out there must around with ChatGPT or you mess around with some of the generative Arc tools that are out there. What you get sometimes is our first draft. You don’t get the newspaper, or call it, you are going to publish. You go back and forth between word, the deterministic tool and what you prompted and got from a natural language tool to synergize around what you think is an edited publishable product.
What happens in the Unity Editor is the character designers and the level designers and the animators and the lighting people and the physics people and the dialogue people. They work in concert to produce a product.
And what you can see us -- what you will see us doing, and I mean, this year, in the near-term is introducing natural language interface within the Editor to allow people to go back and forth between using a relatively complex tool that is deterministic where they have to work with it to yield an outcome and natural language was to give them a first draft and what they are trying to do.
In some cases, the deterministic tool will be easier to use. If you are trying to create apology for the development lesson here, but if you try to create something like volumetric fog inside of a digital twin or inside of a game. You see all that atmospheric stuff that is so typical of movies and games, et cetera.
Personally, I find it easier to take the sliders, because I don’t even know how to describe volume at per clock, how dense it should be, how viscous it should be, how reflective it should be, how rapidly it would be moving, a couple of sliders you get what you want.
If I was trying to create another effect, it might be easier to start with something natural language. I want a Lion or on a fence or a house or a window or a door or if it’s in your inventory that is being built by the team that’s working on the digital twin. I want this particular manufacturing piece that we manufacture, I want it right here. That will be much easier on a natural language interface and I expect people to work back and forth.
So that was just 1 part of our advantage that I mentioned is that, we are obviously, by far, the leading platform for this type of content creation. And what we expect is people to use both, because just using natural language is really almost impossible and it’s likely to be impossible for a very long time to be able to create something that benefits from team production processes and get something that is consumer ready.
Now in addition to that, you can -- we are definitely going to build applications that lead to the end or connected to the Editor for people that are entirely non-technical so they can use natural language to impact content inside the Editor. That is relatively easy for us to do, it’s worked well advanced and I feel very good about that. But that is net new users and there’s a large, large number of net users available to us.
So what I expect from this and just looking at the Editor alone, one piece of what we are talking about, I expect to see more usage to be edited by professional, because they will be more productive using the combination of deterministic and natural language tools.
They can use that for scripting C-Sharp scripting, for example, we are using copilot and then added inside of Unity. The other side of this is new users coming to the platform because the most prolific and most widely used tool on the planet for professionals gets easier and easier to use for non-professionals or artists that just don’t want to interact with the developer’s tool.
So we feel great about AI. I don’t want to take the 45 minutes and speak to all of the points that I’d like to talk about and go through our roadmap, but that’s just tip of the iceberg and it’s positive.
That’s super helpful. And if I could maybe sort of dovetail on the comments around sort of the lower end of the market for a moment. Maybe on pricing for Create, you guys just took price when I think the industry might have been at its weakest point, and it sounds like from a lot of our checks that there was basically no developer attrition. And I think at a high level, that sort of suggests that the price value relationship probably still sits in the developer’s favor. I am curious how you guys think about maybe striking more of a balance and then specifically addressing the low end of the market where a lot of your users are still unpaid? Is that something that you guys would think about exploring over the course of the year, next year, anything specific you could say on that front would be appreciated?
So, yes, and your observation is correct. We still have pricing flexibility and we didn’t get a lot of negative feedback when we took pricing recently around our new pricing approach for the Editor, a stiffer glasses of users [ph].
Here’s what I would tell you is, what I expect right now to go from here. How do we get paid? I will use the game industry. We get paid because of our Grow business, which is the larger of the two businesses today, same customers paying us. We paid SaaS revenue on the tools today and then we get paid for UGS more usage.
What I expect AI does is it causes a lot of workload in the cloud, a lot of workload on Unity’s servers. But in addition to that, cloud services that we are building around Weta tools, for example, or others within the Unity tool, like, tool place like SpeedTree, for example. So I see a lot of opportunity for us to add ratable revenue as our developers start to use more AI tools and to build more complex and richer, more advanced world.
So what I expect pricing will kick in later this year as our customers come off their prior contracts onto the new pricing level. That will lift revenues in the balance of this year, added cloud revenue for more usage.
And while I didn’t speak to this yet, the run time represents opportunity for us as well and here we have an advantage. Almost all AI work that’s cross-platform is going to end up being done on the server side and that’s expensive for our customers.
We have announced Barracuda, which is a tool set that enables an inference engine to be run on the handheld device or a computer or a PC or console. We think there’s opportunity in there. Of course, we want them to use our servers, but they can run local is a big advantage for Unity over all other alternatives for this type of AI work.
Thanks a lot.
Great. Okay. We will turn to Dylan Becker at William Blair.
Yeah. Hey, guys. I appreciate it. Maybe to give you another couple of minutes on that AI headstone platform, John, and you called out the Barracuda piece. I wonder, are there any parallels that you guys can kind of call out, as you have seen, again, creation tools moving from static 2D to interactive 3D, now embedding these within generative AI, maybe more personalized efforts and what that can mean for content delivery, but some of the lessons and learnings as you guys kind of already have led this transition in one form or the other?
Wow! I could talk about that for an hour or more. And so let me just make some observations. So how do either the current art tools that are out there that allow you to degenerative or the large language models work.
They study lots of examples for things, and then based on prompts, they give you a best fit or 5 best fits or 10 best fits that either represent an answer to what you asked for a girl on a bike and a wheat field and the style of band go, you get a picture of that or you describe a poly me want or a dialogue you want or a script if you want and it’s not very hard to imagine.
For example, these models, both on the content side or the frames and art side and the dialogue side for bringing that together. And if you look at a film, for example, television and film is typically 20 frames a second.
And it’s not impossible, it’s actually quite easy to scan every frame, scan the dialogues, scan the sound, you have to listen to it, we get to play it. And in some future, future just in place, we are going to see the possibility where you are going to see not just the sort of the miserable examples of doctor video has come out so far. You are going to see some decent work that comes out of the film side.
Now the observation I would make for you here, these games are really different, games are very different. So if you are calling -- if you are applying a game with me and you hit the Xbox and shoot me in the shoulder and we are playing a shooter. And I hit the triangle button and duck, but I duck just a little bit too late. So I get it -- I get wind in the shoulder and I spin around and I fall to the ground and there’s blood and all the rest of it that goes on in the video game.
Now what’s actually happening there is different than what you can scan. You can scan that outcome. But what you need to be able to scan if you are going to think that, is your input, my input, the frames and the sound, the physics and the lighting and the code that drove the light in the physics.
Because those frames are never going to be repeated again. They are unique to where you hit may. They are unique to the timing of you getting the X button, they are unique to the timing of me hitting the triangle button.
And so the challenge around this is, where can you try and to do that, where can you try to create an outcome that advances content creation. Now in the Editor, I am guessing a bunch of you haven’t opened the Editor, but we are at the open the Editor.
You would see a screen that is your creation screen where you are dragging dropping and putting stuff up there, you would see a run time screen, which is how it would look if you provided those types of triangle and text inputs, that’s a run time screen. There’s only one place you can try on that inside the Unity Editor.
You can read the code. You can read the run time screen. You can read the input that the creator used. So content creation in the gaming world, which is not the artifact can be scanned. It’s happening in real time.
Now I have no doubt that pure natural language we will be able to produce really simple games as long as enough rules are put into the tool to create it. But the rich content that we have gotten used to is going to be harder to try and now it doesn’t mean it won’t get trying, but companies like Unity are going to be deeply involved in that process and others are going to be outside looking at.
And so I feel very confident in our position as Unity, where by way of example, in terms of third-party tools outside of Asia, north of 70% of games are built in Unity. Our next largest Western competitor is less than 1%.
And so we are in this position where we are -- if you will the de facto tool for doing this kind of work and as we bring these tools, these AI capabilities into the Editor, I think, we can win for our customers and win for ourselves.
I think, though, that AI is going to have a profound effect on the industry. First, it’s going to lead to inflection up in growth as game types are built that we were not previously possible. And secondly, we are going to see, I believe some of the crazy expense that goes on in some high-end production come down some. It’s a favorable part for the game industry for growth and this going to be very favorable for Unity as we drive some of these changes to the industry.
Got it. I appreciate the depth of the answer there. Maybe one quick clarification for Luis. On the financial side, looking at the balance sheet here. I guess thinking about capital allocation. I know you guys have the buyback in place. You have got about a $3 billion roughly in converts out there. I guess, as we are ramping the margin profile, just kind of any thoughts on capital allocation? Thanks.
Yeah. Dylan, similar to what we talked last time, we are looking at the market and there is a credit crunch out there. So we are happy with $1.6 billion that we have in the bank. We would be generating cash this year, but we want to be very prudent. So don’t expect anything dramatic there.
Thanks, guys.
Okay. Yeah. So let’s go to Gili at Goldman Sachs, please.
Hi, everyone. Thanks. Yeah. Gili on for Kash. Congrats on the results and thanks for taking my question. I will give you guys a break around AI, even though I agree with everybody on the call that it’s very exciting and it’s -- we are all waiting to tune into what you guys do. But my question is more around the health of the industry or the non-gaming selling motion. Given that tight budgets and let us continue to be a common headline across industries in 1Q, any color you can provide around new business or renewal trends in that part of the business would be great?
So, first off, we are really proud of our digital twin business and new customers coming to our platform literally every week and we have made a number of announcements. I wish more than we are further in the development process, because we could show you the beautiful and incredible things that they are building. But again, we have made announcements in the shareholder letter and they keep coming.
And they come to us for a variety of things, whether it’s high-end watch companies around the manufacturing process, the marketing process, the auto industry around manufacturing process, large facilities, including cities like Orlando and airports in terms of how to run safely and effectively in a large environment, buildings, architecture, engineering, construction, also in the energy field.
Now the fundamental advantage Unity brings versus most tools that are out there is that we are real-time. And what that means is, instead of looking in the rearview mirror, you are looking at exactly where you are today. It’s more of a, like, the dashboard of your car, which is another place Unity is increasingly used today in terms of plays in cars.
But you are looking at the present and that is a huge advantage, a huge advantage relative to the traditional companies that compete in the digital twin rate, which is why we are getting so much interest.
Now I have to admit and I am glad you asked the question, that when I greenlit the Barracuda project five years ago to be able to do this. I did not anticipate that we would have a scaled digital twin business in the way that we do, and I frankly didn’t anticipate the actual use case.
So I thought AI on device was going to be really, really cool, and I didn’t -- me and my team and one of my colleagues, Savio [ph], that put this in place, he ran labs at the time. We knew there would be something cool. We didn’t know exactly what it is. I am very glad we did it.
And this allows us to not look at the present. It allows us to run a massive amount of simulation in the cloud, but then run on device. So all of these people that work on the factory floor and a large auto company can get -- they can anticipate what they should do next based on what’s happening in the present, run simulation for lots of different scenarios and it can propose and advance the workflow in virtually any environment.
And I think that’s actually going to be a deciding point for digital twins going forward at a massive scale, because right now, what they do is they largely look backwards and they try to come to their own intelligence and then change things.
We are going to be able and can use data in the present to help shape the future and I think that’s always been the promise of digital twins. It’s just a promise as of yet, not delivered and Unity has the advantage of being able to do that on device.
So most digital wins today sadly are constrained on a big manufacturing floor. The manager that’s up in the booth overseeing thousands of people in the manufacturing facility. Where we are carrying this is it’s on a device that every person on the factory floor has it and is using it to enhance what they are doing in the present.
The guy in the factory look overlooking the factory, that’s the past. We are in the present and as we bring AI to these people on the factory floor or in any other environment, they are looking into tomorrow. They are getting something better than they have ever had before and that’s really an unlock of, I think, huge value.
And the other angle of this is when I talk to customers on the digital twin side to say, but isn’t that going to give me a staggering phone bill. In other words, my -- aren’t going to have to pay the various cloud providers in an enormous way. I read about OpenAI spending so much money on training their algorithms that it’s frightening to imagine what the cost will be, and we say, well, it might, but this allows you to run it on device.
Having a large number of people that are training on device, on the cell phones or tablets or other things they are using to interact with this data, they can run it for free and that’s a big advantage. We have all seen that you can aggregate a bunch of PCs to replicate a supercomputer. This is a similar thesis. You can do things on device in a way that makes that load less expensive.
And I think that’s another competitive advantage for Unity and we are unique in having built that. So I feel great about this side of the business as well. And we are in the process of using for scaling on that side of the business and you will see more about that in the course of the next weeks.
Great. Thank you so much.
We will go to Stephen Ju, Credit Suisse.
All right. Great. So I want to get us back on the AI train here. I just wanted to follow up on your comments.
I think we should have had this call run by ChatGPT. To answering questions about AI.
Yeah. Yeah.
All right. Stephen, I will give it back to you.
All right. So around the Unity Editor and I get that we are not going to get there all at once, but what you are describing here makes us want to think about the potential for a one-man game development company, which is the verbal prompts from the rider driving all the content creation. It does sound like longer term this has the potential to increase the number of creators, but maybe also decrease the number of developers who can interact with Create. So versus sort of a historical 1.5 million people that we have been thinking about, can you think about the puts and takes here, because thinking about this as just a positive, net positive just seems too good to be true. And also, can you help us think about what this does for -- to your earlier commentary about digital twins and 3D content creation outside the game industry, does this help you significantly expand the addressable market sooner? So maybe longer term, the puts and takes just inside the game sector maybe just does not matter. And I guess, Luis, bringing this back down to earth a little bit and the present, I think, you recently announced a reduction in force. So can you talk about the dollar impact to OpEx and EBITDA for the year? Thank you.
So, I think, that’s the longest question we have had there in for several quarters.
Yeah.
So, thanks, Stephen, for that one. Puts and takes, so first off, there are already lots of single person game development organizations out there. And I can -- Flappy Bird as an example was made by one person. And some of the most successful sort of runner type games and puzzle games are built by one, two, sometimes three people.
A lot of hyper casual games are today built by one, two or three people. So that already exists as a phenomenon. And they are pleasantly almost always using Unity, which is something we make -- we are very happy about.
The second thing is, once you get up from that the single player -- the single person making this stuff. My expectation, just need to think about for a minute is, whether you are making a movie or a game or anything. The primary issue is whether you are successful or not, the revenue is supposed to exceed cost by a lot and it’s a very competitive market for high quality product that’s out there.
And I don’t foresee a place for a time where an individual that is great at level design is likely to be greater character sign, it likely to be greater animation or lighting or physics or all of the things that yield balance in a game, et cetera. That doesn’t mean that a developer isn’t going to get a crisp choice here and I believe they will.
Do I want to make a game twice as good with the same number of people or do I want to make a game just as good with half the people and that is definitely going to be a choice? Now how does that frame up against Unity?
We are already two-thirds of our revenue is from one level or another is usage of games, the play of games, the interactions on a server from games. So as an observation, that’s not necessary for us, it might be good for us if that’s where it goes.
The second thing I would tell you is I think that, a lot of developers, I think, are going to opt for the same number of more developers making better products, because the prices are huge. I think if you look at the marketplace today and say, what entertainment products have ever generated $10 billion in revenue, in the first, I don’t know, 25 things you would come up with are all games. It is a very lucrative market for people to produce better and more differentiated products.
And the third thing is we have been talking a lot at Unity about and with all of you, is a lot of our revenue that we see revenue growth in Unity is going to come from cloud-based usage, how the tools are used, how the rendering works, how the build process works and less than seats. We believe most of our revenue and revenue growth from Unity is more around usage than it is around seats.
So the gaming side, I think, you can do puts and takes and you can have your own window on what you might think those things balance out to, I think, they are pretty positive for Unity’s revenue streams, very positive, which is why we are confident enough in a world where this is all happening to raise our guidance and should not lower it.
The second point on digital twins. This is an industry that is much larger than the game industry, with large, looking over the entirety of it and we are uniquely positioned to deliver AI-enhanced run time to enable real-time 3Ds that are driven real-time simulation that’s driven off device, which is a huge positive. I can see nothing there but it’s not just pure positive.
And here, one of the reasons we built the usage-based platform, one is it solves a problem for our customers. But secondly, we anticipated that we wanted the majority of our revenue if not almost the entirety of our revenue in time to come from usage based, not from seats.
Because we don’t see a major luxury watch company having 50 developers and sustaining that. They might have 50 watch designers, but they are not going to have people doing like what you do in the game industry. So I don’t see this as much any other way than positive and I think it’s positive short- and long-term.
Stephen, to your second question and thanks for inviting me into the conversation. We -- if you were to isolate this effect, it’s about $18 million for full quarter.
Got you. All right. Thank you.
Sure.
Okay. We will turn it over to Bernie McTernan.
Great. Thanks for taking the question. Again, sticking on AI, I think, I know the answer just wanted to clarify a point on it. Are there opportunities to upsell some of these capabilities as far as the goal to really make the more ubiquitous and continue to democratize the technology?
I didn’t if I catch that question. I am sorry, I had a blip in my network.
Yeah. Just all the different AI, different products that you are rolling out, do you think those about upsell opportunities or opportunities to charge more for your service or is the goal just to continue to democratize the tools in AI is just another example of that?
Right. So if I were to do a quick lifting. One is AI is already driving outperformance on our ad network. That’s a positive. I think it is going to democratize and bring more people into the tool set. We typically capture the majority of the developers on a smaller portion of the artists. Natural language will be artist into the tool. I refine web app approach I talked about before or directly into the Editor using natural language. So I think it’s a positive there and that, I think, fits up the notion of democratization.
And then the area I am most excited about and one I think is probably the biggest growth driver for us is the fact that our run time, while it was a massively pervasive tool that’s being used on 4 billion devices today gets increasingly powerful to enable a game play or digital twins that are more advanced than maybe Gene Roddenberry saw it coming, but not many people did. I am so excited about that. I think it’s going to drive users to our platform in a huge way and it’s uniquely ours. So I feel great about it.
Thank you.
Great. Parker Lane.
Hi, guys. Can you hear me okay?
Yeah.
Yeah.
Perfect. John, I will skip AI for this one. I want to go back to last quarter’s theme, which was synergies and you just discussed it a little bit there, Luis. But when we think about synergies in the context of the adjusted EBITDA ramp here, how far along are we in the identification and execution against the synergies post IS?
How far along? 25%, I don’t know, it’d been, okay, less than half, a lot more to go. But I can say, with no hesitation that it’s driving revenue now. We just add a plus big to get AB, we are getting more than we had in the combination and that’s mostly on the Grow side.
But we are also seeing the Create side enable revenue streams better on the Grow side and we are seeing uptick in tool usage from Grow from the endorsement of Unity and for being part of the Editor.
There are so many things I’d like to tell you about, but we tend not to describe what’s going to happen the day after tomorrow or the month after next. But there are some really substantial programs under development in Unity that will generate increased synergy for our customers and increase revenue for Unity because of the combination.
And so here’s what I hold you to. Ask me in the December, I guess, end of November, December call about synergies, because right now, I am describing great performance today because of it with more to come and in December, that’s going to be a much more fun conversation to have based on work we have underway and product we have coming to market.
Got it. I will make sure to circle back later this year. If I could sneak one more in here on digital twins. I noticed you guys talked about reducing your reliance on Professional Services to drive adoption there. Can you dive into that dynamic a little bit more and the implications of that and the go-to-market strategy?
Luis, you or me.
Yeah. Go ahead, John.
All right. So, first off, let me just describe the life cycle of a digital twin customer with Unity. And the life cycle is, they usually start with what feels a bit like an RFP process, where they say, I want a digital twin.
They might even not call it a digital twin. I want automation here, I want something, but it always fits into our rubber of digital twin, which is bringing the physical world into a digital world, simulating driven by data, typically IoT data, significant real-time adjusted data to yield out for them.
So the first innings are about scoping it. It’s amazing how much science fiction these people consume, because they have always got ideas that are amazingly ambitious. The next stage is building it. Now this is where digital twin customers differ from game customers.
When we talk to Activision or in Japan to Square, we talk to, Ruby Soft, we talk to any of the major mobile publishers out there, King, et cetera, and Zynga. They have already got an army of developers, they typically got thousands of developers in their company using Unity. So we are talking to them about what they might do next and adding to that.
Inside of the City of Orlando or the airports where we do business with the car companies, they might have a couple of dozen developers, but they don’t have a lot. And so what typically starts our relationship is a Professional Services agreement, where we build for them with their people on our team, the first cut at that digital twin.
And then as that digital twin gets built, it gives way to an ongoing usage-based revenue stream from our -- from the cloud side of our business, where we ingest the digital twin data, the IoT data in order to run that application for them.
And so -- and then we always keep seats because they want to be able to mess with it over time. But when Luis said in the prepared remarks or in the response to one of the questions, we want less reliant on Professional Services. We never ambitioned or theorized that we were going to grow our Professional Services business to $1 billion business someday. It doesn’t mean that it might not be there when the Unity is a $15 billion company.
But it’s not how we saw this going. We have always seen this going where the lion’s share of our digital twin business is cloud-based ratable revenue for operating the digital twin, not Professional Services revenue for creating the digital twin.
It doesn’t mean Professional Services goes away. It’s still a growth line for us. But we are not emphasizing that as a growth vector, which is one of the reasons we signed partnerships with people like Booz Allen and with Capgemini.
We are very happy to allow them to do the building of that digital twin, one, Booz more in the government side of things and Capgemini across a number of sectors in energy, as an example. And so we are very happy to have these integrators work towards creating cloud-based high margin revenue for Unity.
And so what we see happening on the digital twin side is, we have a lot of demand at the top of the funnel, and frankly, we have to turn away business at the top of the funnel, because we don’t intend to scale our Professional Services business as rapidly as we otherwise could, getting our use case was out there and then shifting each one to ongoing ratable revenue, which because it’s fundamental to their workflows and fundamental to how they operate their businesses, they look to me, like, the closest thing to permanent revenue that I can see.
So I feel very good about this transformation. Add AI to that and you have the opportunity for more revenue on the ratable side. And secondly, greater and more positive differentiation versus traditional tools.
Really great feedback. Thanks, John.
All right. Well, we have like in a football game or a hockey game where the Bruins losing overtime, I had to throw in a Boston sports. We come to the end of this call. But thank you all so much. Thank you for your interest. Thank you for your very good questions. We really appreciate it.
And I will turn it over to John to finish it up, but we will see you again soon, I am sure.
All right. So thanks for sticking with us. You definitely beat my estimation on AI questions. I thought it was going to be half the call. It didn’t occur to me that it might be three quarters of the call.
But, look, I feel very good about Unity. We had a great first quarter. We are guiding for more great quarters for the balance of the year. We feel really good about our business, because we are a platform, because we are generating strong synergy. There is massive energy inside this company to serve our creators in ways that they haven’t even imagined yet, part of that is AI.
And I believe AI is going to be positive for the industries we compete in and it’s going to be positive for Unity’s market share in those industries and it’s going to be positive for the revenue that we yield from those market share point gains. So we feel good about where we are and thanks for your patience today. I appreciate all the good questions.
Thank you, everyone.
Thanks.