Unity Software Inc

NYSE:U

Earnings Call Transcript 2021-Q2

[John Riccitiello]

game launches, including Knockout City and Balan. What is most important in our operating solutions are the connections between these components; foundational elements such as privacy controls, identity, payments, billing, security are embedded in our offerings to make sure that each of these products works seamlessly with each other.

Another critical part of an integrated system has been our ability to leverage context and data insights effectively through ML-driven optimization. From a reach of 3.4 billion monthly active users as of June 21, we can deliver the best ROI for customers. This combined with a tight linkage to our Create platform has enabled us to gain share across these important markets. At Unity, we have a durable business designed to deliver many years of exceptional growth. We enjoy fundamental advantages on our scale in gaming, our ease of use, and our extensibility for non-game verticals, a massive scale over data footprint, and the linkage between our Create and Operate platforms.

These advantages have led to 11 consecutive quarters of greater than 30% growth, and as of late, growth exceeding 40%. We're proud of our performance this year and the years prior, and I want to thank all of our customers for helping us get where we are in today. We look forward to our journey together, and I very much want to thank Unity's 4600 plus employees. It's an honor to work with such a dedicated, talented, and amazing team. And speaking of teams, today we are taking great pleasure in announcing the addition to Unity, Keisha Smith-Jeremie as a new board member.

Keisha brings decades of experience in human resources and talent management to our board. She's the Chief People Officer of Tory Burch, the iconic American lifestyle brand, and previously served as a Chief Human Resource at News -- Chief Human Resource Officer at News Corp and the Global Co-Head of Talent Management at Morgan Stanley. She will serve on our Compensation Committee.

Having Keisha on our board is a reflection of our understanding that Unity's s innovative, hard-working, problem-solving people are, in fact, our most important competitive advantage. Keisha, welcome to team Unity. Now let me turn the call over to Luis who will briefly run through our financial results.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Thank you, John. We delivered another strong quarter with excellent execution by the Unity team, beating both guidance and street expectations. The strong momentum and health of our business are enabling us to raise revenue guidance for the full year by another $45 million. Q2 '21 revenue of 274 million increased by 48% year-over-year.

While we saw strong performance across the board, I want to especially call out the outstanding work from the Operate team. As I mentioned last quarter, we were well prepared for Apple's privacy changes, and as a result of excellence in execution, we build market share for this quarter. We're proud to help customers thrive during the uncertainties of our platform change. Our advanced analytics, context, and insights are proving to be a competitive advantage. Create also had a strong quarter with revenue of $72 million up 31% year-over-year. Operate revenue of $183 million was up 63% year-on-year.

And strategic partnerships revenue of $18 million was up 9% year-over-year. We continued to add new customers during the quarter with 888 customers each generating more than $100,000 of revenue in the trailing 12 months as of 30 June 2021, up from 716 a year earlier. And our dollar base net expansion rate as of 30 June 2021 was 142% equal to last year. Unity's customer base is becoming more diverse as we expand from games into other verticals at a fast pace. We can -- we expect to continue to see good progress in bringing real-time 3D to new industries.

Non-GAAP gross margin of 81% was up 300 basis points on a sequential basis and on a year-on-year basis as we operate more efficiently and benefit from product mix. We remain confident -- that we can sustain gross margins above 70% for the long term. Q2 2021 non-GAAP operating loss was $3.2 million compared to 8.7 million last year, as we benefited from strong revenue growth. We will continue to invest in our business with emphasis on R&D, as we have many attractive opportunities to go after. We generated a Q2 '21 free cash flow margin of minus 12% compared to minus 43% in Q1.

This quarter includes a one-time cash outlay for the termination of a lease agreement for previously planned occupancy of new office space. We had 4,613 employees at the end of the quarter, up from 3,379 a year ago. This brings me to guidance. Given the strong business momentum, we are again raising revenue guidance for the full year from a range of $1 billion to $1.015 billion to a range of 1.045 billion to 1.060 billion, which represents 35% to 37% revenue growth year-on-year.

This is a 45 million increase from prior guidance. With the offsetting revenue, we are also increasing our non-GAAP income as we are reducing our fiscal year loss guidance from a range of 90 million to 100 million to a range of 55 million to 65 million. We will continue to invest in driving the business. We are focused on long-term value creation. For Q3, we expect revenue of 260 million to 265 million, which represents 29% to 32% revenue growth year-over-year. This year's Q3 compares against the 2020 quarter during which shelter in place or there's boosted engagement more than in prior years.

For Q3, we expect a non-GAAP operating loss for the quarter to be between 15 million and 20 million. We remain committed to reaching non-GAAP profitability in 2023, while we continue to invest to extend our technological lead and reach more customers.

In terms of share count, we're forecasting 327 million fully diluted shares outstanding for the quarter and 328 million for the full year. With that, I want to welcome Pixyz and SpeedTree to Unity. We closed the acquisition of Metaverse Technologies, providers of Pixyz, a 3D data preparation, and optimization software in Q2. The acquisition means professional creators can more easily and quickly import 3D data into Unity and optimize models for real-time development.

And we closed the acquisition of Interactive Data Visualization, Inc., the popular SpeedTree Environment Creation Suite in July. The acquisition enables deeper integration of SpeedTree to the Unity ecosystem, enhancing artists authoring workflows and environments creation capabilities. This is another great step to enable artists with Unity. In summary, we're very pleased with our performance and prospects. We're building a sustainable business with massive scale opportunities. The strong first - half gives us the confidence to raise our guidance for the year and make us optimistic about 2022.

With that, let me turn it back to John, who will announce another addition to the Unity family to enable creators, which is now pending customary closing conditions that we expect to close in Q3. This acquisition will not have a material impact on our fiscal year results. John?

[John Riccitiello]

Thanks, Luis. I'm excited to announce that we have reached a definitive agreement with the intent to acquire Parsec. I'll fill you on what Parsec does in just a minute. But an important reason we're optimistic and confident about the combination with Parsec is that it had become truly viral inside of our development organization. And when we looked at some of our largest customers and saw the same rapid adoption curve of Parsec, we knew we had found something special.

Now, for those of you who are not familiar with Parsec, they are a remote desktop and streaming Company that allows individuals and companies to work together from anywhere. What Parsec has done is deeply innovative because they have built a platform that can support the rigorous requirements of creative professional applications.

As you likely can imagine, the work of game development and creative professionals is incredibly complex. It's a high fidelity, it's immersive, rich in detail, it's interactive, and it's only going to get more complex as creators shift more and more to real-time 3D. Creators need low latency, ultra-high-definition desktop streaming, and Parsec delivers this in spades, delivering variable lightning-speed streaming at 4K 60 frame per second. But they also need more. Parsec provides rich detail with the same sampling rates for all images like 4:4:4 color space and the private security quality of life management tools needed for companies to support pleasing computer resources for all of their creators.

And with companies and their employees collaborating and working in fundamentally different ways, whether it's hybrid, remote, or distributed work environments, Parsec has addressed the unique requirements to support this type of high-performance processing no matter where they are. Parsec and their founders and leaders, Benjy Boxer and Chris Dickson, have been both had highly innovative impressions of their technology.

Parsec also focuses on simplicity and access. You can get started with a fully professional-grade creator class remote desktop linkage with just a push of a button. And as individuals and companies use Parsec, they can drive incremental virality and further adoption with coworkers, peers, and partners.

As a result of their unique capabilities on the shift to new ways of working, Parsec for Teams subscription business is growing over 150% year-over-year with an aggressive plan to accelerate even further next year. Subscription growth is driven by a strong net dollar expansion rate of nearly 200%. They have a loyal customer base. Even before we entered into this agreement with Parsec, as I'd mentioned, our own internal developers were adopting Parsec, but we're hardly alone. Parsec has strong relationships with gaming companies like EA, Ubisoft, Square Enix, and many of the industry verticals where we sell solutions including media and entertainment, architecture, design, and more.

We see an opportunity to drive shared momentum with these customers through targeted cross-selling and bundled solutions. Parsec is a key step towards Unity's expanded Cloud Vision, based on our shared understanding that creators expect to be able to work from anywhere on any device and will require rich and powerful tools, and cloud infrastructure to deliver real-time 3D experience s for the future.

When we think about the future through the lens of Create, our view as a creative process will evolve from on-premise devices to flexible and cross cost-effective cloud architectures. This is why we're investing in collaboration and moving more of our capabilities to the cloud. We'll share more details after we close the transaction. And with that, I will turn the call over to Richard, who will run us through our questions.

[Richard Davis, Investor Relations]

Great. Thanks very much. So, we'll move on to the Q&A section. And so, as we did on the last call, we collected and sorted questions from analysts and this allows us to get through almost twice as many questions as you get on normal telephone call ups. Then at the end, we're going to open it up for open questions and stuff that you guys might have for us as well. So, as we approached the Open Questions section, just raise your hand on the virtual system, and then we'll call on you, guys.

So, first question, we'll start with financials. So, this call is about earnings, so let's do some financials to start with. So, we have remained, as you've just heard, active on the M&A front during the quarter and Mario Lou at Barclays honed in on this with a couple of good questions, specifically, do you see the potential for further M&A to drive growth? We've just announced some.

Any updates on recent acquisitions with regard to the rest of AR and automatics? And then also, he asked about the Pixyz software partnership with NVIDIA and Microsoft. Is there a possibility to expand there? And then finally, Brent Bracelin at Piper asked with regard to how we're doing on Pixyz as well. So now we're doing cross-sell and things like that. So, Luis, if you want to roll with M&A questions, that'd be great.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Yeah. Thank you, Richard, and thanks for the question, Mario Lou and Brent. We believe that M&A will continue to play a role in our future. We use a disciplined approach to evaluate opportunities through what I would say three lenses. First, do the acquisitions significantly accelerate our capabilities and our key strategic focus areas to strengthen our position in the market? Second, can we generate an attractive return on our investment? And third, can we execute with excellence?

We track the performance of our acquisitions. In fact, we completed the last update about a month ago. Overall, our acquisitions are in aggregate performing in line with expectations we set when we signed the deals. And we believe that many of these acquisitions have the potential to accelerate our growth even further. As you would expect, there are some opportunities where we can do better, and we have plans to do so.

Now on the point on Pixyz, Pixyz has been part of our offering for many years. And as I mentioned in my prepared remarks, Pixyz enables professional creators to more easily and quickly input 3D data into Unity and optimize models for real-time development.

Said differently, Pixyz offers best-in-class tools to digest optimized 3D data for real life. This is a great capability that enables creators both in games and other verticals with strong customers across several industries. And to your point, we look forward to strengthening our partnerships with Microsoft and NVIDIA.

[Richard Davis, Investor Relations]

Great. And then another question for Luis. Gal Munda at Berenberg has a good question. It says, "Now that you've been in the job for more than a quarter, what are some of the early observations of the low-hanging fruit that you've seen and that you can focus on in the near term, either from a purely financial or a strategic perspective?''

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Yeah. Thank you, Gal. It seems like I've been here for a little bit longer than that, but it's been a lot of fun. I'm very happy to be at Unity. As I've said before, I believe that this is what I would call a once-in-a-lifetime opportunity. The team is outstanding, the technical mastery, deep business expertise, the culture is really unique and fantastic, and the passion for winning is as high as I have ever seen.

Successful Unity is to enable more creators, as the metaverse evolves. And as a result, we believe that we can sustain revenue growth at or above 30% per year for the long -term. And we will do so while creating leverage to improve our operating margins and free cash flow over time. This requires us to operate with clear strategies and discipline and allocate resources to those ideas and projects that can generate businesses at scale.

[Richard Davis, Investor Relations]

Great. So now we're under monetization. And as usual, we have several questions on IDFA. So, we're going to hand this over to John. So, we have a handful of questions, so we'll start with Stephen Ju over Credit Suisse asked the following. What is Unity's relative advantage in making sure that publishers are well and are better compensated overtime versus other networks?

[John Riccitiello]

Thanks, Stephen. We started our monetization business 7 years ago with the thesis that the whole legacy "buy low, sell high" model in advertising at best delivered short-term success and was in reality kind of a broken business model. Our monetization program is based on a deep, deep understanding of user LTV and engagement, and we succeed when we deliver superior ROI for customers. This means it's really about data.

We leveraged 3 billion -- you heard me announce earlier we reached 3.4 billion again the last quarter, 3 billion MAUs producing petabytes of data from Unity's SDKs and integration with our engine and we apply advanced analytic -- analytics and machine learning algorithms to create and manage a true ROI on behalf of our customers. So, what we're optimizing for is engagement in LTV, not spread. It's a really different business.

Now, there's more going on out there, it's complicated. And reading the media lately, it seems like the world may be moving into more of a closed and silent platform based on first-party data. Here we have the advantage. We've got our own proprietary data.

But I believe creators want options so they can choose a tool, services, and monetization partners that are best for them. It's important to note that our monetization tools are open. We have over 50 partners that are a unified option, and we have the goal of maximizing revenue for publishers. That's our north star. And at Unity, we believe more choices are better than less, -- better than fewer.

And ultimately, if we optimize for the success of our creators, our publishers, we'll be rewarded with businesses growth. We saw that this last quarter in the last several years. Our near - and long-term results were [Indiscernible] for this [Indiscernible] so far, and we continue down that path.

[Richard Davis, Investor Relations]

Great. And another question, John. This one comes from Matt Cost over at Morgan Stanley, who asked about industry-wide trends in ad spending. Because if you listen to different conversations and press releases and things, some people say it was pulled forward, while other people say that it was reduced because of difficulty over attribution. So, yeah, what's going on there? It seems like there's a lot of crosscurrents.

[John Riccitiello]

Well, we're hearing some confusing stories from the individual publisher, each has their own truth, and I'm sure they're living their own truth. Look, if there's anything that's constant in gaming or constant in monetization, it's changed. Sometimes the changes are small, sometimes they're big, but they happen every quarter, every year.

What I would say really on this is a longer-term investment in advertising can't go a different direction than revenue in the industry. Attrition is a reality in the videogame world, and people need to invest in user acquisition in order to continue to have successful, thriving game businesses. And of all of the things I'm confident of, it's that gaming is going to continue to be a successful thriving business for companies based in North America, Europe, and Asia.

Now, our view is advertisers, publishers are going to continue to spend as long as they're getting quality players at a positive ROI. That's what we do. In fact, we've got tools like Audience Pinpointer that allows advertisers to find what ROAS they'd like to target or based on retention, our IAP or ad revenues, so they can get a guaranteed return regardless of what's happening with changes in attribution. That's what we're delivering.

Our results reflect the continued increase in ad spending on the Unity network, something we've been consistent with. But again, I don't think there can be -- maybe a quarter or two at a time, but there can't be a material divergence between user acquisition spent and industry growth. They go hand-in-hand.

[Richard Davis, Investor Relations]

Great. And then one last question on monetization. Bhavan Suri at William Blair asks, how big of a factor is conversion post-backs now that advertising level with the iOS 15 update this fall? And to what extent does that impact companies like Facebook? It seems to have a big impact on them, but how does that play out for firms like Unity?

[John Riccitiello]

Look, I wouldn't want to get the figures to try to step into the Facebook executive team view as to what -- how this affects them. But Bhavan, it's a good question. I'll give you my point of view. We've always been a proponent of the open attribution ecosystem and supported all attribution providers from day 1 in monetization.

For Unity, adding another proprietor protocol is a normal course of business. And when it comes to SKad post backs for other systems, we're there and ready to implement. And we're pleased to see a more level playing field and then move away from self-attributing networks.

We believe content creators and advertisers should have choices in what services they use and that includes having an open ecosystem of attribution for rather -- rather than a single standard or attribution authority. But that's consistent with who we are. We believe in open systems, competition, choice, and those surprising [Indiscernible] here, too.

[Richard Davis, Investor Relations]

Great. Okay, we'll now move on to some macro discussions and return to normalcy. We got similar questions, or at least thematically, from Ophir Gottlieb from Capital Market Laboratories and Bhavan over at William Blair. And those -- basically, the comment was, can you talk about overall engagement trends that you, see? Some people have concerns -- express concerns about how reopening might impact gaming and all their anecdotal? People say the shift is sustainable. Maybe you could just give some color on what you're seeing and what you expect over the next few quarters. And maybe, Luis, if you could run with that one.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Sure. Thank you for your -- Bhavan for the question. We're actually very pleased with the engagement metrics that we see. Globally, we are seeing more unique active users than ever before. And if I look back and look at 2020, the pandemic spike that started to decline a little bit in the fall of 2020, but then quickly ramped back up over the wintertime and led to 2021 having an all-time high unique user count globally.

And then what we're seeing year-to-date is monthly active users have continued to grow somewhere in excess of 20% year-on-year. We're seeing particular growth in APAC, Japan, Korea during 2021. Europe is also doing great, America is a little behind, but also growing very nicely. So, we're seeing good growth across the board.

[Richard Davis, Investor Relations]

Great. We have a question about ESG. ESG has become an important topic of late. In fact, William Blair has a section on every report about ESG and Bhavan Siri asked about what we're doing on the ESG front. So maybe Luis, if you want to run with that one.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Sure. You know, we're committed to ESG to have a positive impact on the communities, employees, creators, customers, the environment, our shareholders, and we have to recognize where they -- in the early stages of building our ESG program. We're conducting our metric reality, assessment, and aligning with the global reporting initiative and sustainability accounting more frameworks so that we can better understand our current position and opportunities to reach our goals.

We have an internal team dedicated to measuring and coordinating our efforts, and we have a full list of programs listed on our investor page. But let me highlight a few just for this call. On the environmental side, we're currently conducting our greenhouse gas assessment. We're also supporting Unity customers to become more sustainable, and those making the world more sustainable with the power of our technology.

On social impact, we empower employees and creators of all backgrounds to foster a more inclusive sustainable world. In fact, we have donated time, technology, and shares now valued at over $75 million to enable positive change in education and economic opportunities, sustainability, and health. On governance, we're committed to an inclusive workplace and governance approach [Indiscernible] in our values of empathy, respect, and opportunity. We know that there is a lot more work to be done, but we continue to be committed on this front, and we'll be sharing more details at a later date.

[Richard Davis, Investor Relations]

Great. Well, why don't we move on to Operate -- beyond monetization. So, I'll be fair godly, but Capital Markets Labs picked up on the theme of social gaming and how that might play out in the broader addressable market. His question is: Can you comment on the progress of social games as it relates to multiplay Vivox and deltaDNA? And more broadly, how should we think about the opportunity as you involve and extend multiplay so that that becomes a backbone of a broader cloud product offering for both games and industry verticals? John, why don't you take that one?

[John Riccitiello]

So first off, just a little background. If you go back on the order of 20 years, you'd see that most PC and console games for single-player games, you play it against the machine and you later play socially on the couch. Sports games were at the forefront of that. But gaming was largely a solo activity. H as console and PC games got ready for -- had the capability of getting to be multiplayer products, that took over.

And it's the dominant form of gameplay for most games out there is a lot of PC and console. Mobile is lagged back partly because they're not on broadband networks and they haven't had the CPUG performative technology to support it. That's changing. Social games and mobile games are becoming multiplayer. And with that, we see a very substantial opportunity for Unity because we're a leading provider of the back-end resources, the operating resources enabled multiplayer and multi-user gaming.

These services, as you mentioned, they include multi-play Heavy Boxer, Ashmaker. And we're seeing healthy growth on this front with more casual games, Knockout City, Konami, Super Bomberman, and many, many others. And they tend to use hosting matchmaking voice services but there's also a lot of tricky bits to this. One area, in particular, is networking code. It's a very difficult thing to master for many mobile game developers.

Sudden traffic spikes and they get -- they find themselves to have a hit and they need 10, 15, 20X the hosting capacity than they plan for. And then there's the management of toxicity. And we see that everywhere in our environment, but it's also true in track and gaming as these people come together.

And so, we're building new tools on top of what we have at multiplay to make it just as easy for a two-person team to create these types of games to succeed as it is with a hundred-person studio. So, it's a great question because social and mobile are becoming a much bigger multiplayer experience than they've ever been before. I think it's an unstoppable trend. And it speaks to opportunity on the Operate side.

[Richard Davis, Investor Relations]

Great. We've got -- pivot over to Create for games. So, we have another question from Matt Cost over at Morgan Stanley and he asked, "A large competitor recently took their game engine open source. How is the competitive landscape with other engines changing in gaming? And do you believe the market will continue to consolidate to a small number of players?" John, you have an obvious good perspective on this one, so maybe if you could play this one out.

[John Riccitiello]

Well, yeah. Matt, I'll start by saying, what do you mean by large? The Company that owns them or both of the games that were using as I mentioned. So, I'm not sure that I'd call that a large competitor, but I appreciate that opportunity for humor. I hope you take it that way. But [Indiscernible] source has been a business model in technology and it's always going to be around. Godot has been around forever, and that's an open-source engine. The reality is game engines are really hard: scalability, stability requires ongoing investment, commitment to QA.

Another key bit is we're often working with builders of new platforms or existing platforms on hardware innovations that are going to take place next year or the year after and the year after that. We master those now so that when software creators or game developers show up with the product that's supposed to be optimum for the new hardware, it works on the new hardware.

That's really hard for an open-source player to really get in front of that. But we're embedded in these companies and it's nearly impossible for folks on the open-source side to do that. They have a role to play, but I think it's really tough. And then the competitive context, the landscaping gaming has been tough. We saw King externalize our engines several years ago. Autodesk used to be a direct competitor. I believe you were referring to Amazon a little while ago with Lumberyard. It's not an easy industry.

And we think that our investment goes such that we believe we can continue to gain. We told you we got 71 shares on the top 1,000 games on mobile. Our next largest competitor is far behind. We have a very strong position in Nintendo on all the consoles, PC, AR/VR, and we keep upping our R&D effort. So, we think we're in a really good position to deal competitively in the market. I believe we are going to see continued market share growth.

[Richard Davis, Investor Relations]

Great. We have a question from Brent Bracelin at Piper Sandler. And he has done some good fundamental work and asks, "Based on new hiring intentions for Unity developers at Apple, Facebook, and Walmart to build new AR/VR applications that we've picked up on, could you spend some time articulating the opportunity for Unity within the AR/VR space in the pace of adoption you're seeing?" John, if you could run with that one.

[John Riccitiello]

Yeah. I mean, look, I -- I'm going to step back in time a little bit. Several years ago, I gave a presentation on a proper gap of disappointment, which basically said that analysts were projecting staggering growth in a world of AR and VR, particularly the consumer side. I don't think that's going to happen because we didn't really have the right combination of hardware, ease-of-use, content library, killer apps.

I see that starting to change, and you see that [Indiscernible] this change as well, and the confidence that companies like Facebook and others, you mentioned Walmart, all sorts of companies across many of our verticals. We're getting really excited about AR/VR because they are starting to see traction on the selling of hardware.

Facebook has announced some great numbers around +2. I know there have been some setbacks at different points in time. But -- and based on what I see coming from hardware players, I think this is about to happen. Not tomorrow, but over the course of the next 3 to 4 years, we're going to see a sizable market in AR/VR and there's nothing that makes me happier is a sizable market bridging around a [Indiscernible] where we have a very, very, very strong acquisition. So, people, we're hiring, this time it's real. I think the next 3 or 4 years, I think under [Indiscernible].

[Richard Davis, Investor Relations]

Great. We have a question about new entrants in cloud opportunities. Bhavan Siri asks Microsoft cloud gaming -- Microsoft recently announced the extension of their ex-CoD offering. We'd love to get your thoughts on the cloud gaming opportunities, especially because there have been several attempts in the past with mixed levels of success. And what that could mean for Unity with Project Tiny, etc. And in a similar vein, Mario Lou asked, how do we look at the entry of Netflix into the end of the market? So maybe I'll run with one. So, thank you both, Bhavan and Mario, for these two good questions.

[Richard Davis, Investor Relations]

So, look, first of this at a high level, we'll start then we'll drill down as of context. First off, we benefit when new forms of connectivity’s, the games emerged. More people come into the market, which means more games need to be built to fill the new entertainment needs, and so that's generally good for Unity because we -- they build games, we do better. So, when we see a Company like Netflix enter the market, we view that as a good thing. Now, double-clicking down on the subscription question. Game subscriptions have scaled out slower than we've seen in music and streaming services. So, let's think about why that would be the case. We're not going too far into the weeds.

We believe there are really technical hurdles that have made it difficult to cost-effectively deliver a great user experience to consumers that evolve their consumption patterns. So as opposed to right now what you have is basically delivering the same games to play in the same way. So, think about how -- the way you consume movies and music differently now than the days when you had -- bought a CD at a store and went to the movie. So far, we just have not seen that evolution in-game consumption.

But at Unity, we believe we have a lot of the technological tools to solve those challenges, and subsequently, we will give game developers opportunities to change how they -- how games are consumed. And if we do that, we will unlock new business models and consumption patterns for millions of more people. For example, our portfolio, as you know, includes Tiny, Furioos, DOTS, and several other modules that among other things have made the streaming game less CPU and GPU intensive.

So, the big answer to the question is basically the takeaway that we're broadly optimistic about the rise in gaming subscription services and the ability for Unity to help in that area and create for verticals. And as always, we save the best question for last. And that comes from the team of Tom Roderick and Max Aniweta (ph.) at Stifel, "You often get asked about when verticals are going to be bigger than gaming. If you have an update on that trend line, this would be great.

But maybe a more interesting question is, what revenue model will get you there right now because you have to Create which is seat-count based sub-growth subscriptions, but you also have Operate which is chugging along with a usage-based model like we see from Snowflake, Stripe, and others.'' John, that's, I think, a good question right up your alley. And that'll be our last question before the open mic.

[John Riccitiello]

Sure. So, it's a great question because it really speaks for a lot of what we're working in -- working on internally, with several or initiatives. So, you heard me earlier announced several new customers adds a significant number of major new customers on the vertical side. So, we're seeing the uptake. And today we generate outside gaming’s permanently a SaaS business and professional services business. You're right. We sell seat licenses, and we sell runtime applications like [Indiscernible] and [Indiscernible] to our customers.

These companies also typically need help getting up and running with their new applications. And so, with companies like Walgreens and Lowe's and The Nature Conservancy and many, many others. We are for professional services. You -- in the prior question, we talked about, how they're hiring Unity developers. A lot of companies are, but they often need professional services from Unity to augment a more -- smaller scale team than they have internally to build what it is they want. Hence, they engage with us on professional services. But I do think you hit on a really important thing.

When it comes to these verticals, they're not much to the scale in the same way the game companies are with thousands and thousands of developers. And here you'll see more usage-based models. We are already working on a consumption model with Furioos. We -- pretty much all of our Operate services are based on a consumption model. When we price, and this is early stages around simulation or visual twin parts of our business, we tend to focus on thinking about an individual serving as a seat.

That makes it a consumption model on the basis of computing applied to the problem. So, I would say that as we continue to evolve and grow in scale, we're going to continue to see strong growth on the vertical side and we will see a shift over time from professional services and seat licenses to consumption models that will be based on a variety of metrics, sometimes how many servers are being used for something, another will be for streaming. And there'll be a series of those, but think of consumption models being significantly additive to verticals in time.

[Richard Davis, Investor Relations]

Great. Okay, now we'll open it up to direct questions. I mean, I guess you can start with Matt Cost at Morgan Stanley. If you want to open up your video, ask a question, then we'll roll the other folks as well too.

[Matthew Cost, Morgan Stanley]

Great. Thanks a lot for the question, guys. So, I guess Operate obviously came in very strong for the quarter. You mentioned share gains that you picked up on that side of the business to do with monetization. I was just curious, what were the drivers in your opinion of those share gains and what trends did you see over 2Q, and can you give an update quarter-to-date in Q3 on how those trends in the monetization side are doing? Thanks.

[John Riccitiello]

So, I'm going to reset my speakers. And Luis, you might want to take that because that came across pretty jumbled for me. So, Luis, can you pick that up and I'll open and close my audio drivers, see if that helps.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Sounds good. Yeah, Matt, great question. And we talked about IDFA last quarter and if you remember what I said back then is that we prepare for IDFA for over two years. And I also mentioned that our upgrade organization captures and analyzes 50 billion INAP events each day. No, and that's whatever 35 million every single minute. So that's pretty amazing and we do that across these 20 platforms. And I mentioned that our spending across our platform was really strong and I expect that some market growth.

And really the reason for that is our contextual models, which actually do not rely on IDFA. We're working very well. Our scale and depth provide us access to vast amounts of data, which is really based on end-user engagement and platform performance data. And the feedback we were getting even back then was very strong from our customers.

Now, I think some of our customers were saying things like, hey, we partnered with every single network out there and Unity's readiness and guidance are far above anybody else. And that allowed us a quarter ago to raise our guidance by about $50 million. And really what we continue to see is exactly the same thing s as we saw last quarter. The same advantages. and as John mentioned, IDFA is clearly having an impact in the industry, but it's impacting different players in a different way.

Now, some of them are accelerating, some of them are decelerating. We are fortunate to be prepared and to have the data and all these analytics Audience Pinpointer being at Q1, where we're actually accelerating, and that is again, allowing us to raise our guidance by this $45 million that we talked about about earlier. So, it's the same message that we talked about, Matt, a quarter ago, we just continue to see it play out and it's -- we're performing very strongly in this environment.

[John Riccitiello]

And just to build on Luis' point, I now better understand the question. Earlier we got this question about -- on the advertising business and I connected advertising revenues to the industry -- the gaming industry. I really think the best way to think about this, and we have deep experience from what happened in Europe or in GDPR, are disruptions affect relative market share. They affect one publisher differently than another. We're approx on the industry while gaining market share.

So, I think at the aggregate level, it's doubtless in my mind that we're going to see growth in the ads market. Will it affect every publisher the same? No, because the LTV calculation is different, not just for every publisher, but for every game within every publisher, and often in every major geography for every game and every publisher. The aggregate is there. The harsh reality is when you change some of the monetization mechanisms that are out there as IDFA did and as GDPR did before, it affects the relative fortunes. Who's up the top of the stack, who's second, who's third?

I'm happy to say through this, whatever it was GDPR or IDFA, we've anticipated well enough to be net winners in those equations. But I do expect to see some shuffling on some other networks or some own network having more difficulty adapting to these rules. And on a relative basis, different publishers are going to end up with different stories.

[Richard Davis, Investor Relations]

Great.

[Matthew Cost, Morgan Stanley]

Great. Thanks, guys, and sorry for any audio issues [Indiscernible].

[Richard Davis, Investor Relations]

No, it's fine.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

If I can just add, Matt, just to complement. Our unique context and inside is really the competitive advantage for us. Developers come to Unity first when they are making their games, not to other platforms. Our runtime is in the app, in addition to many other Operate services. So, we have the scale and that's will come in to [Indiscernible] nicely.

[Richard Davis, Investor Relations]

Great. Tom Roderick, do you want to pop in?

[Tom Roderick, Unidentified]

Outstanding, okay. Can you hear me, okay?

[John Riccitiello]

Hey, Tom, I can hear you perfectly.

[Tom Roderick, Unidentified]

Wonderful. All right. Away we go. So, John, Luis, and Richard, I think maybe I'll try to put an even finer point on Matt's question because I think it's a great question and there are all these crosscurrents that everybody is trying to figure out. And when I weigh what's clearly a monster quarter that you just put up really just tremendous trends there, and then sort of measure that against the forward guidance where you're looking at a sequential down number.

And so, I guess the question you're going to undoubtedly get, I think with a finer point on it from a lot of people is, should we be nervous about that? Is that a reflection of sequential trends on engagement that are tougher? Is it a reflection of just uncertainty around the advertising ecosystem? Or is it just, hey, we just put up a monster quarter, don't kill us. We're going to be a little bit conservative and keep the horse in the barn a little bit.

[John Riccitiello]

So, I'm going to waste 30 seconds of an answer to give Luis time to prepare one. But I can assure you, Tom, we're not nervous. And if we're not nervous, I would not encourage you to be nervous. We feel great about our business. There is nothing about sequential guidance that has us feel any less good about where we are or where we're going and our long-term growth and our short-term growth opportunity. So, with that premumble, Luis might want to speak to seasonality and sequential quartering and how guidance works.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Yeah. I mean, if we were nervous, Tom, we would not be raising 45 million again after doing that just a quarter ago. So were not nervous, we are very bullish on the business. If you look at 2 years ago and you look at Q3 relative to Q2, you'll see that -- the real seasonality last year. Seasonality was overly impacted by COVID, so it's a little bit misleading.

We just -- we know that that's how the business upgrades. Summer and holiday seasons have traditionally been peak months for us, particularly in the Operate business, which is more of a consumption-based model. So that's what's impacting us. But we're very -- we feel very good about the health of the business as we've said many times in the call.

[John Riccitiello]

Yes. I want to add to this specifically, Tom. The lower months were summer vacation months for a bunch of different reasons, but it's -- we've seen such dramatic growth that it's sometimes hard to parse seasonality from sequential growth.

[Tom Roderick, Unidentified]

Very fair. Okay. And then a really quick one. Luis, you touched on it. Just on Parsec, there is probably a Millennium Falcon joke to make it there, I'll let Richard make it later. But you mentioned it's not material, which I get, but that materiality has a lot of different levels. Is there any revenue associated within at all inside of the guidance? And so, can you just give us a sense of that or is this strictly a product Company that you're bolting on to the vision here?

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Yeah. There is very, very little revenue this year, Tom. Nothing material in any way. So no, I wouldn't -- it's -- that -- if the question is, is that why you were raising our guidance? Absolutely no. It's a great Company. We love it. The technology is amazing as John explained. We think that the future is very -- is great, but the impact of this year is very, very small.

[John Riccitiello]

To put a point on that, Luis and I would never discuss Parsec whilst we were working on our guidance. Also, we don't -- we try not to include it in the guidance. [Indiscernible] name is [Indiscernible] [Indiscernible].

[Tom Roderick, Unidentified]

Very [Indiscernible]. Excellent. Thank you all. Appreciate it.

[Richard Davis, Investor Relations]

Hey, Brent Bracelin, are you up?

[Brent Bracelin, Unidentified]

Hey, guys. So good afternoon. Thank you for taking the question. Two quick ones here. You got to start with Operate, obviously, crushing numbers here for 3 consecutive quarters, in the phase IDFA, pretty impressive. I just wanted to ask, given the guide which is pretty consistent here in the last 3 quarters, over 30% and actuals are much stronger.

But what was linearity? Monthly linearity in the quarter, did you see the Operate business start to trend on a year-over-year basis down in Month 3, or was it stronger in Month 3? Any sort of color on Operate linearity as we just think about how it performed in the quarter as IDFA started to be implemented?

[Luis Visoso, Senior Vice President, Chief Financial Officer]

What I would say Brent is -- well, we don't disclose that. We are very -- the linearity was good during the quarter. We feel very good about the linearity. And again, if it was not, we would not have raised guidance for the year by as much as we did. We feel good about the health of the business. We looked at it by geo, by business, by month, and by anyway, you look at it, and we feel good about it. So not a concern there, Brent.

[Brent Bracelin, Unidentified]

Got it. Well, your [Indiscernible] bargaining share going to post the IDFA. I guess my last question for you John on Parsec, could you think about that opportunity? Do you think that's going to be as part of the subscription offering and functionality of the base package you've planned to kind of operate that as a separate kind of subscription offer? What are your initial thoughts? I'm sure that it will change over time, but what are the initial thoughts on the packaging and bundling of Parsec?

[John Riccitiello]

First off, both. Let me trace back to that question. Remember, Brent, about a half-hour ago, I'd mentioned, we said we can 5X our coverage on the gaming industry to pick up artists. There's a boatload of artists that are using Parsec now. Weirdly enough, I think with a lot of customers, they can draw Unity into the seat more than the other way around because there are 30 bucks a month.

It's an easy and essential component for a game developer to have a remote system. The other thing is a lot of developers are -- and honestly are -- they need something like Parsec to be able to come in and use their tablet to do any sort of creation, and Parsec provides for that.

And so, my sense is that this is one of those Goldilocks fields where we can pull them into customers, they can pull us into customers, and we can bundle and gain penetration with customers that we both share with significant penetration. And with Benjy and Chris, I met, I mean, I wish it was half as smart as they are when I was their age. They're just killing it with deep insight and just execution that I stand back and marvel at. I feel really, really good about this one.

[Brent Bracelin, Unidentified]

Well, it sounds encouraging. Thank you so much.

[Richard Davis, Investor Relations]

Hey, Stephen Ju, are you available?

[Stephen Ju, Unidentified]

Yes, sir.

[Richard Davis, Investor Relations]

Okay. Great.

[Stephen Ju, Unidentified]

Hi. I guess following up on the questions around the advertising business, there is the marketing spend from the video game developers, but there's also the larger opportunities, a lot broader set of advertisers across more verticals. So, can you talk about what you're doing to onboard more non-endemic, non-video game advertisers? Thanks.

[John Riccitiello]

Yeah, sure. So, first up, we're experimenting at the margins on the supply side for non-game advertisers. Think of us as being supply-side game industry and demand-side anybody, but mostly on the game side. And then we've got big partnerships with a number of aggregators defined or network, most notably Google, and they bring a lot of brand advertising among other things.

So, I frankly expect, and based on what I see out there, is that we're seeing more and more sophistication. Non-game advertising is buying into game industry networks. And so, we'll probably see more there, but it's still the lion's share of this is still game advertising on both sides of the equation. But again, we're open to both sides. Does that answer your question, Stephen? He went mute on me. Okay.

[Stephen Ju, Unidentified]

Sorry. Yeah. I'm just thinking about the longer-term opportunity because --

[John Riccitiello]

I think the longer term --

[Stephen Ju, Unidentified]

Yeah.

[John Riccitiello]

Let me be really clear. I think the longer-term for Unity is a bigger box than we're operating within monetization. We're experimenting constantly. We have a more data-centric client advertising that all but a few of the players you learned to love and admire like a goal on Facebook. There are precious few companies anywhere with our sophistication around advertising and data, and those are skills that we want to acquire more broadly and will. But when you're approaching 60% quarters, you're focused on the quarter, and that's what we're doing now outside of our business.

[Stephen Ju, Unidentified]

Gotcha. Thanks, John.

[Richard Davis, Investor Relations]

Great. And then Ophir Gottlieb.

[Ophir Gottlieb, Unidentified]

Hey there. Thanks for taking my question, and thanks for the format, Richard.

[Richard Davis, Investor Relations]

You're welcome.

[Ophir Gottlieb, Unidentified]

I wanted -- I was hoping you guys could talk about DBNER. And I ask because in Q2 and Q3 of last year, the COVID quarters we saw this -- Unity had a spike, right? Low 140s, mid 140s, and it didn't seem sustainable per se. Here we are in Q2 of 2021 and it's 142% again. Can you talk a little bit about what's driving that? Maybe an update on Q3 or even longer-term guardrails on -- on that metric? Thanks

[John Riccitiello]

Luis or me?

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Do you want to go, John?

[John Riccitiello]

Sure. Look. One of the things that help when the [Indiscernible] calibration is not -- [Indiscernible] is not an extension to [Indiscernible] and we [Indiscernible] look at these things a little bit like, whenever there are more than two numbers involved and you're doing multiplication and division, you have to understand what some of the underlying trend lines are. What's helping us keep that number up is we keep graduating customers from below the 100 thresholds, above the 400 thresholds, and they can bring a lot of growth.

And then the second thing that's happening is we are taking our larger customers and continuing to grow them. So, we're seeing growth at the bottom of the stack, the top of the stack, and then we keep bringing people into the stack. To be honest with you, when we set up the guide for this year, we were guiding materially lower than we're currently realizing in our revenue number.

And a lot of that is our continued success for the customers above our plan, above our expectations. And so, it's what you want to see as the CEO. It's kind of pleasant to wake up in the morning and you see something and its usually good news, almost always good news. And our -- we're bringing new customers on the platform rapidly. And when they get to the platform, we're growing them rapidly. It's a good time to be at Unity. It's why we are as bullish as we are.

[Ophir Gottlieb, Unidentified]

All right. Thank you.

[Richard Davis, Investor Relations]

Great. And then we're just about done. Kash, did you have a question or do you want to chat when we do the callbacks, which's better for you?

[Kash Rangan, Unidentified]

I'll chat with them in the callback. Thank you so much. Maybe after.

[Richard Davis, Investor Relations]

Okay. All right. Great. Well, that wraps it up. We did it in 61 minutes, so that's not too bad. So, we appreciate everyone being on the call and we definitely look forward to seeing you either at conferences or on our next earnings call. But thank you very much and we appreciate your interest and support.

[Luis Visoso, Senior Vice President, Chief Financial Officer]

Thank you.

[John Riccitiello]

Thanks, everyone.