Podcast #38 - Unity deep dive

Unity Software is best known for its game engine, which was used for over 50% of all video games in 2020. But Unity is also used to create over 60% of all VR/AR applications, and is starting to expand into other industries such as automotive, architecture, manufacturing, film, and retail. It’s not just about Pokemon Go!

In this week’s pod, we take a deep dive into Unity, and have a fantastic discussion with Karle Kane, the founder of Rainfall Games.

• Unity is one of the largest development platforms for gaming and was used to create over 50% of video games across 20 platforms in 2020. It is even more dominant in mobile gaming where 71% of the top 1,000 mobile games in 2020 used Unity. 93 of the top 100 game studios by revenue are Unity customers, and on average there were 2.7B people each month who consumed content created with Unity in 2020. Unity estimates their addressable market in gaming at $12B growing to $16B by 2025
• Over 60% of all VR/AR experiences are created with Unity, and this platform was used to create 90% of all Microsoft HoloLens and Samsung Gear VR experiences. AR/VR is seeing increased adoption, not just in gaming but also in other industries including healthcare, manufacturing, architecture and design and the VR/AR market is projected to grow by 63% per year through 2025. Unity estimates their current opportunity in VR/AR at $17B
• They have three main business segments: Create Solutions, a subscription-based business providing access to Unity’s development tools; Operate Solutions, a usage-based business helping game developers to run and monetise their games; and Strategic Partnerships, where tech partners such as Apple, Microsoft, Nintendo and Sony pay Unity to support their hardware and software. These three segments contributed 30%, 61% and 9% of revenue respectively in 2020, with Operate Solutions growing the fastest
• Unity acquired Applifier and launched their in-game advertising network in 2014, and this is now one of the world’s largest mobile ad networks serving 23B ads per month. Unity does not break-out advertising revenue from their Operate Solutions segment, but the whole segment had revenues of $471M in 2020, an increase of 61% from the previous year. However, recent changes in iOS to prevent app tracking is estimated to reduce revenues by $30M in 2021, which represents 3% of total revenue
• Total revenue for 2020 was $772M, an increase of 43% from the previous year. Existing customers are buying more each year, with DBNERs of 138%, 133% and 124% for 2020, 2019 and 2018 respectively. The business is reinvesting in growth and has not shown a consistent profit as yet, having just become free cashflow positive in Q4 2020. They ended 2020 with $1.3B in cash with a further $480M in marketable securities and zero debt
• Unity currently has a market cap of $23B with a P/S ratio of 24. Despite the huge 50% drop from its all-time high in January, the stock remains relatively expensive and will need to maintain continued high revenue growth to justify the valuation

The following companies are mentioned in this episode: U, VUZI, AAPL, FB

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