Unity Software Inc. (U) Q3 2020 Earnings Call Transcript

Unity Software Inc. (U -2.31%)
Q3 2020 Earnings Call
Nov 12, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

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Richard Davis -- Vice President, Investor and Strategy

Thank you, and welcome everyone, to Unity's First Financial Results Webcast, highlighting our Results for the Third Quarter of 2020. It's great to have you join us today after a successful initial public offering. With me on the call, today are John Riccitiello, president, chief executive officer, and executive chairman; and Kim Jabal, senior vice president, and chief financial officer. After their remarks, we will open the call for a Q&A session.

I'd like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including business outlook, expectations for future financial performance, and similar items, including, without limitation, expressions using the terminology, may, will, and believe, and expressions which reflect something other than historical fact, are intended to identify forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, including those discussed in the Risk Factors section of our filing with the SEC. Actual results may differ materially from forward-looking statements.

The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events that may arise after this conference call, except as required by law. For more information, please refer to the cautionary statement included in the slides we have posted to our Investor Relations website at investors.unity.com. In addition, during the meeting, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not substitute for or superior to measures of financial performance prepared in accordance with GAAP.

The reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures can be found in today's earnings release, which is available on our website and as an exhibit to our filings furnished to the SEC. With that, thank you for joining us, and I will turn it over to John.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Thank you, Richard. Hello, and good afternoon. Thank you for joining us today for our first public company earnings call. I hope you and your loved ones are safe and in good health in these difficult and turbulent times.

I want to begin by thanking the amazing team that got us to this point from our Founders 14 years ago to our employees around the world, our advisors, and our new investors. And we would not be here today without our customers, the creators, the developers, the artists, and the dreamers. We're looking forward to sharing details about Unity and our third-quarter results with you today. As many of you are aware, we capped our third quarter with a successful IPO that we conducted virtually.

The IPO, or as we like to call it, the UPO, was the second-largest software IPO in the last decade and was executed under an innovative structure which gave us better visibility and demand for optimal pricing and allocation. It also gave our employees the opportunity to sell a portion of their shares and vested options on day one of trading. We welcome all of our new shareholders here today. Kim Jabal, our chief financial officer, will detail financials in a few minutes.

But before we dive in, I want to highlight three key points on our Q3 performance. First, despite several macro crosscurrents, we grew revenue 53% compared to Q3 of last year, and we generated a 79% non-GAAP gross margin, and our non-GAAP loss from operations was $8 million versus $28 million last year. Second, the metrics that drove those numbers were good as well. One of the KPIs we focus on is the dollar-based net expansion rate.

And for the third quarter, that ratio hit 144%, thanks to a combination of strong execution and some tailwinds from COVID-induced work-from-home policies. And third, you can't deliver good financials without a strong foundation of innovative products and services, as well as a tuned go-to-market strategy. Here are some of the interesting statistics. In the first nine months of 2020, we've seen an average of more than 5 billion downloads per month of applications built on Unity.

And as of the end of Q3, we had approximately 2.5 billion monthly active end users who consumed content created or operated with our solutions. 94 of the top 100 game development companies by global revenue are Unity customers. And as of the end of Q3, 10 of the Top 10 auto manufacturers are using Unity. Unity is the world's leading platform for creating and operating interactive real-time 3D content.

Creators and developers use Unity to build, to run, and monetize interactive real-time 2D and 3D content for more than 20 different platforms, including mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices. Much of the content consumed today, like TV and movies, websites, social media, YouTube, and TikToK is static or non-interactive and/or 2D digital content. Real-time 3D interactive content allows end-users to connect with the content and with each other. Media built on Unity's real-time 3D platform gives users agency over their content, align them to control what they experience next, rather than being passive consumers of content.

This interactivity, together with a full 3D perspective, allows for a fundamentally more engaging and immersive experience than traditional content does. We believe that most of the world's content will, in time, be real-time 3D, and it is our intent to be the driver toward this future. Now, it was a bold idea some years ago that a third-party engine like Unity could grow and ultimately be the technology under most of the world's games. And it is a bold idea today that industry after industry will convert from their 20th-century dependence on non-interactive, low engagement 2D tools to embrace real-time 3D.

Technologically, we build a single platform that enables our customers to build, to operate, and monetize applications. With Unity, you build an application once, and that application just works seamlessly on more than 20 platforms. Instead of mastering and porting their content to additional platforms, developers can focus on creating great content and on multiple paths to success. And while there are blockbuster AAA games that cost $60 or more upfront, today, far more games are initially free-to-play, and that's great for consumers.

But game developers need some revenue to pay the bills. And they do this through in-game advertising and in-app purchases that make the game more engaging and more enjoyable. And that's where Operate services from Unity come into the picture. Five years ago, we launched our monetization products.

Unlike traditional ad works that optimize exclusively for eCPMs, we designed our platform to help our customers maximize engagement, enjoyment, and the lifetime value or LTV of their users by leveraging unique data and proprietary AI tools. This might sound like a relatively easy task, but it was not. We started with a few hundred thousand player behavior data points. But with a lot of work, we gradually built one of the leading data networks for gaming.

We've reached the scale where we ingest 60 billion in-app events per day. This data helps us deliver better LTV and lower cost to acquire for our customers. And this has helped us build one of the largest monetization platforms focused on the games market. We also offer additional Operate solutions, including deltaDNA and user engagement, Multiplay, cloud hosting, and Orchestration and in-game communications through Vivox.

Today, these technologies mostly apply to gaming, but we see many opportunities to extend our platform into other industry verticals in the future. We are a market share leader and have strong healthy growth opportunities across the Board, both in Create and our Operate businesses. We're not resting on our laurels. We have big ambitions.

First, we continue to focus on our core gaming market and believe we can increase our business in this sector significantly in the coming years by continuing to innovate and leverage our data advantage and adding new Create and Operate tools and services. Beyond gaming, we began to focus on new verticals just a few years ago. We're growing into new verticals like industrial, automotive, architecture, engineering, and entertainment, rapidly solving more and more customer problems and identifying more and more use cases. And while we're gaining rapidly in these sectors, we are also examining new industries to enter and expand.

Let me give you a few examples. Toyota worked with Unity to create a mixed reality system for diagnostics and repairs for their dealerships and service networks. This was a high-stakes decision because repairs have a big impact on brand perception. Toyota used to manually tag 20,000 pictures to ingest them into a learning algorithm, a process that tok about 200 hours.

Toyota turned to Unity to build accurate 3D models of the body and engine compartment. This reduced Toyota's workflow time to 30 minutes, a 400 times reduction. Valerio Dewalt Train was invited to build on the design of a 36 story, 390 foot tall Bell Tower and Bell Park Office Building in Denver, Colorado. This was a complicated project because the location and the size of the tower mattered to city planners.

Valerio deployed our architecture product, Unity Reflect, to geolocate the building on site and develop an augmented Reality digital twin. By using Reflect, Valerio Dewalt Train built a prototype in less than four weeks and won the bid with the city. Now I want to wrap with a discussion of what we hope to turn into a tradition on these earnings calls, a brief highlight of some of the new innovative products that our development teams have built. In September, we launched the LEGO Microgame, a free to use set of modules that allows entry-level users to build and share their first 3D game in less than an hour, using a simple no-code interface.

In adding the LEGO Microgame to our growing portfolio of templates that help new users to start creating successfully, we believe the low-code, the no-code market will become a substantial part of Unity's business in the years ahead. And we are grateful to work with such a well-regarded brand to help bridge the gap between physical products and the virtual world. And for Unity, we have built a low friction on-ramp for budding new game designers. In Q4, we're launching another application specifically designed for verticals outside of gaming.

It's called Forma. And it's an example of our ability to build technically advanced applications that are intuitive and easy to use. The shift to working from home has accelerated the move to virtual commerce. Meanwhile, today's shoppers are more sophisticated, and they expect to see their visions come to life in real-time.

And this is where Forma comes in. One use case for Forma, as an example, is an automotive manufacturer that creates advertisements, product guides, and a car configurator that are engaging, interactive, and in real-time 3D. This gives customers a much richer visualization for their potential purchase, including colors, fabrics, and accessories. In that way, Forma gives marketers a tool to differentiate themselves from their competition.

We've made great progress, but we are just getting started. At Unity, we believe the world is a better place with more creators in it. And we intend to realize this belief by making real-time interactive 3D, the dominant form of content worldwide. As a company, we will invest for the long-term to ensure we deliver for our customers the Unity developer.

And through this long-term investment orientation, we aim to drive significant growth for many years to come. We welcome our new shareholders on this journey. Now, let me turn over the discussion to Kim Jabal, our CFO, to go through our financial results.

Kim Jabal -- Senior Vice President and Chief Financial Officer

Thank you, John, and thank you all for joining us on our first earnings call. This is an exciting time, and I want to echo John's thanks to the entire Unity team for their hard work and dedication that has led us to this moment. We are very pleased to have started our public company life with such a strong quarter. Let me begin by reviewing our financial results.

Revenue for the third quarter of 2020 was $201 million compared with $131 million in the third quarter of 2019. This is an increase of 53% year over year. Our revenue mix has shifted in 2020 to Operate Solutions, with Operate, Create And Strategic partnerships accounting for 60%, 31%, and 9% of revenue, respectively, in Q3. One of our key metrics, dollar-based net expansion rate, sustained its recent high levels, coming in at 144% compared to 132% as of September 30, 2019.

Please do note that some of our expansion in 2020 was driven by COVID tailwinds in the Operate business, and this may result in a tough comparison in 2021. Drilling down into our operating groups, Create revenue grew 45% to $63 million. While the first half of the year introduced some COVID related headwinds as game developers adapted to work-from-home environments and deal cycles slowed, we saw a recovery in Q3 in our Create business. Our customers are turning to Unity to help them create and build everything in real-time 3D, from the next-generation of office buildings to self-driving cars to the video games enjoyed by millions of people around the world.

Operate Solutions had a very strong quarter, growing 72% versus last year. These results reflect strong execution and product improvements, alongside higher end-user engagement with games built by our customers. This is driven in part by COVID tailwinds. Our Operate Solutions are aligned with the success of our customers.

This is really important. When our customers grow their engagement with their end-users when they grow their revenues through the use of our monetization tools, they grow their usage of our services, and this drives our revenue growth. Strategic partnerships revenue was flat with last year at $18 million. This reflects slower deal cycles driven by COVID, as well as the sunsetting of certain products within our partners' portfolios.

This revenue line remains very strategic for us, but it can be lumpy from quarter to quarter in terms of growth. Non-GAAP gross margin was 79%. This compares to 81% in the third quarter of last year, and 78% in the second quarter of 2020. The year-over-year decline was due primarily to higher professional services, driving growth in new verticals with the acquisition of Finger Food in April, as well as increased hosting costs to meet the demands and growth from our Operate Solutions business.

Non-GAAP loss from operations for the third quarter was $8 million or negative 4% of revenue, compared to a non-GAAP loss from operations of $28 million or negative 21% of revenue in the same period last year. A substantial part of the year-over-year improvement was driven by onetime savings that we recognized related to COVID, primarily related to travel, events, and facilities. And now turning to our guidance. So to set the context, I want to reiterate that 2020 has been a pretty unusual year with lots of uncertainty related to COVID.

We aren't counting on our normal Q4 seasonal jump in our Operate Solutions business as we believe the increase in user engagement that typically happens around the Q4 holidays has essentially already happened. And in addition, additional uncertainty for our game development customers occurred with this year's announcement from Apple of new policies for the IDFA, which was originally slated for introduction in Q4 but is now delayed until sometime in 2021. From an expense perspective, we are expecting to reinvest some of the material COVID-driven OpEx savings that we achieved throughout the year into incremental marketing programs and hiring in R&D and sales in order to continue to drive our revenue growth. So for the fourth quarter, we expect revenue of $200 million to $204 million and a non-GAAP loss of operations of $35 million to $40 million or approximately 17% to 20% as a percent of revenue.

Our revenue outlook for the full fiscal year ending December 31, 2020, is $752 million to $756 million. This is up from $542 million in 2019, reflecting year-over-year growth of 39% to 40%. We expect non-GAAP loss from operations for all of 2020 to be $66 million to $71 million or approximately 9% as a percent of revenue, down from $92 million in 2019. We expect the weighted average fully diluted share count to be approximately 321 million for the fourth quarter.

I'd like to point out that Q3 free cash flow of positive $11 million benefited from strong performance within our Operate Solutions business, alongside an increase in networking capital. Although we're not guiding free cash flow, you should expect it to remain volatile quarter-to-quarter, and we expect to drop back into negative free cash flow in Q4. And that concludes my prepared remarks. So thank you, again, to the entire Unity team for the hard work that has led us to this point.

And thank you, to all of our new shareholders. We are honored that you have decided to join us on this journey. And with that, John and I, are now happy to take your questions. Richard?

Richard Davis -- Vice President, Investor and Strategy

Great. Thank you, Kim. [Operator Instructions] So, we'll start today with Heather Bellini at Goldman Sachs.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Or not.

Richard Davis -- Vice President, Investor and Strategy

Yes. Heather should be on. She's just said she was on her cellphone.

Heather Bellini -- Goldman Sachs -- Analyst

OK. Now you can hear me. Did you get it?

Richard Davis -- Vice President, Investor and Strategy

Better.

Heather Bellini -- Goldman Sachs -- Analyst

Perfect. Sorry, sorry about that. Look, I had a question, obviously, we all know that the iOS 14 changes were pushed into 2021. When you think about the impact for next year, can you walk us through how you're thinking about that? And then how that might have -- given the delay, how that might have impacted your guidance in Q4 related to what you were expecting would have happened at the time that you guys were on the road since this happened while you were in the middle of the roadshow? And then the other question I would have would just be related to all of the momenta in gaming that's obviously happened as a result of the pandemic.

How are the trends looking versus normal seasonal? And how should we be thinking about that as we look into next year as well? And congratulations on the IPO.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

I'll take a high level, and Kim may want to dig in a little bit. On a high level, Heather, our view was that vis-à-vis iOS 14 and the changes in IDFA, we were not anticipating material disruption in Unity's business. We did expect there to be and we had imagined that there would be a relatively modest, very near-term disruption that would have occurred in Q4. As the demand side started to wrestle with exactly how effective each of the relative platforms as per user acquisition.

We view ourselves as a monetization platform, less so an ad platform, we believe we've got a fundamental advantage on the data side. And that advantage on the data side means that at least we feel we'll be materially less impacted by issues IDFA. And we analogized somewhat to what happened with GDPR, where the anticipation was the entire market would go in a bit of a flux and then there'd be a little bit of a reordering in market shares. And that's exactly what did happen.

And in that, Unity was a net beneficiary. We're not guiding you to believe that we think we're sure it's going to be a net beneficiary situation. But no, we haven't seen anything material and don't anticipate something material for us. In terms of the gaming industry, there's no question there's an increase in usage.

Now that affects some of our business, not all of it. It doesn't have a material effect on the Create side, for example. And in terms of seasonality, one of the things that Kim and I were talking about just yesterday is we would normally see a more aggressive increase on -- particularly modernization, but also operate and host in Q4 as consumers gamers would be home a lot during the Thanksgiving to Christmas holiday. They're already home, they can't go home twice.

And so as much as we would normally anticipate a pickup in Q4, and that pickup would be directly attributable to more game time because of people being home and out of school, it's hard to see how we get that same lift in Q4. A consumer basically can't be home twice. And as Kim put it yesterday in a conversation with maybe analysis we have suggested that we pulled a little bit of the seasonal benefit into Q3.

Heather Bellini -- Goldman Sachs -- Analyst

Great, thank you so much.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Kim, anything to add on any of that.

Kim Jabal -- Senior Vice President and Chief Financial Officer

I don't think so. I think you covered it. Thanks.

Richard Davis -- Vice President, Investor and Strategy

OK. Great. We'll go to Brad Zelnick at Credit Suisse.

Brad Zelnick -- Credit Suisse -- Analyst

Great, thank you so much. Can you guys hear me?

Kim Jabal -- Senior Vice President and Chief Financial Officer

Yes.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Yes.

Brad Zelnick -- Credit Suisse -- Analyst

Great. Awesome. Congrats on the first quarter out of the gate. John, you now have a big war chest post the successful IPO and no shortage of exciting growth opportunities ahead.

Can you just help us understand how you approach investment priorities? What are the most impactful areas of investment as you think about your overall opportunity set? And maybe how is a competition or the larger capital base changed your view.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So I feel like I'm stuck with one of those Abe Lincoln moments with it. I know the two-hour answer to that question, but I'll try to give you the 2-minute answer. The first thing is the money in our bank account doesn't really affect all our investment priorities. The capital is there, should it be necessary.

But when we're looking at M&A and we're looking at our P&L investments in our business, they're not really affected by any sense of need to have the capital burn a hole in our pocket. It's just not at all the way we think. We're strong believers, Kim and I, in defining a pretty tight framework around where our capital should go and where expenses should go. And the consideration was never, we have extra money, so how do we spend it? So that's just not at all who we are.

And I'm a pretty fundamental believer that constrained resources to generate creativity. And creativity is what we run on, that's our fuel. The second thing is when you think about how we spend our money, I broadly categorize it in two broad ways of looking at it. One is we're building a specific application or enhancing a specific application that lives on top of our platform, and Reflect would be an example of that, but also network code, what we've done with collaboration, what we've done with our cloud content and delivery network, these are things that fit right on top.

There's a very specific use case that's identified and enabled by that capability. And through that, we believe we generate more users and more revenue. Sometimes, it's a Create revenue stream, sometimes, it's an Operate revenue stream. Sometimes, it's both.

So we essentially stack rank all of those ideas. And we invest in the ones where we have the right locus of talent and return expectations to make us feel good about making that investment. The second area we invest in a broad and less easy to answer your question around raw capability. And that is about the underlying performance of the engine, the underlying data capability, and the AI capability behind our Operate Services.

In a way, maybe the second one is learning how to make a new thing in a fast-food restaurant. The first one is getting a college education. It's not as obvious that there's an instant return. But one of the benefits, at least for me and so many on our team, is we spent decades on this type of technology and understand, by a way of example, that our DOTS technology won't yield an immediate improvement in our near-term revenue prospects that is significant.

On the other hand, it's exactly the way our business needs to be built in 2023, '24, '25 time frame, that we won't be sitting on legacy code with a material deficit in terms of what we have to dig out of. In other words, we're future-proofing our business. Some of what we've done, this generation, we've been spending for two years, by a way of example, to support the M1 hardware that Apple announced and credited us just this week and supporting both PlayStation 5 and the Xbox 2 Series that are now, the X and S, working with over 60 development studios on the console launches, lots of launch titles built on Unity. None of that yields an instantaneous return for us.

What it spells for us is higher market shares next year and the year after. And so what we have to get right in Unity always is a combination of that which drives a near-term attachment to new revenue streams that we can articulate and identify. And second, that what lifts the whole boat, data engineering, raw capability, platform support, it sets up market share growth two and three years out. And we balance both of those to yield what we believe is the best possible outcome, driven by a combination, I will admit, of financial considerations and ego around market share.

We like to grow.

Brad Zelnick -- Credit Suisse -- Analyst

Thank you for the very thorough answer to my question. That's it for me guys.

Richard Davis -- Vice President, Investor and Strategy

Great, thanks, Brad. Bhavan, can you -- William Blair?

Bhavan Suri -- William Blair and Company -- Analyst

Great. And congrats, I may echo that was a really good quarter coming out of the gate there to all of you and the team. I'd love to touch on a couple of things that tend to be more tactical. I usually tend to avoid tactical questions, but love to have one -- a little bit about, you're seeing a couple of the companies follow suit.

So one is Roblox. And I'd love to understand how you think about Roblox in the space and your view of where it fits vis-à-vis the Unity platform, and how investors should think about it. So some high-level thoughts around that, and maybe even some more details, that's what would be really helpful. I got a quick follow-up.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So that's probably my favorite question today. So thanks for asking that. So one of the things we didn't do in our roadshow and our investment presentation so far is talk about the exhaustive list of growth opportunities that we see in our business. We talked about the ones that are right in front of us that we can define and dimensionalize in terms of scale, and we have a product fit that pretty much proves out our case.

The second preface point is there are precious few professional development tools that have any business at all, any scale business at all with consumers. Photoshop's one of the few things that is crossed over into having meaningful consumer traction. And it's a function of a connect -- a collection of things happening at all the right ways and all the right times. So in the case of Photoshop, smartphones put a digital camera in everybody's pocket.

Most of us didn't use to carry them around before we carried phones with us. And then you have social expression through TikTok, and Instagram, and Facebook and other social media snap where photos are the currency of the day. So the consumer needed a tool, Photoshop met the need. And they have a material business that crosses out of the professional sphere where the tool started and built a meaningful business with the consumer.

We have that exact same opportunity as we speak today. I believe that this notion that we talk a lot about of that the world is a better place with more creators in it and 1.5 million MAUs of people that use our tool. I believe in the fullness of time, there will be hundreds of millions of people using Unity on a monthly basis and a significant complement of them will be consumers. Consumers wanting to express themselves with better videos on TikTok or an Instagram or a Facebook where real-time 3D makes a difference and a positive difference to help them drive more eyeballs and more users.

We recognize that opportunity. It's incremental to the path that we have played out for all of you with our investment thesis. I think it's something that you'll see us do more and more against that consumer opportunity in the quarters and years to come. Now vis-à-vis Roblox, Roblox is one of many indicators that this thesis is right.

There's a lot of 8, 10 and 12-year-old creators that are actually -- most people actually create and Roblox is probably older than that, but the users are younger, that are using the creative side of Roblox in a no-code environment to create things within the Roblox universe. Minecraft is similar. I can name a couple of dozen, a couple of dozen games that have done that and/or MMOs and others where content creation was at the core of one of the gameplay mechanics. That's an indication that that opportunity is real.

So I guess to answer your question, I don't feel at all that we have -- this isn't being ignorant of it. I don't believe we're going to see the Minecraft and the Roblox world come after us so much as to identify a new marketplace that we can build into. I think we have massive natural advantages. And it's one of the reasons we've released things like Reflect, five buttons for our content creators and architect, the recent LEGO release that we did online that I highlighted in my prepared comments, which is bringing that no-code environment to users, getting good traction there.

So expect us to do more to build out an entirely new user base within the Create side of our business in the months and quarters ahead.

Bhavan Suri -- William Blair and Company -- Analyst

No. It's helpful. And my 10-year-old is a customer of Unity. So I'll leave it at that.

I'll ask my next question really. A quick follow-up on ASPs. You increased the price for the first time. I'd love to understand what customers thought about it.

Was there any pushback? And then I know you really that said, we don't want to do it again. But for the value you add, there's the opportunity to increase the price given that you provide a ton of value. How do you think about that strategically?

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Well, I mean the honest truth is I think we've got a situation where we can probably double the price and lose 2%, 3%, 5% of our users. If my number 1 priority was to serve our investors first, I would do just that. And -- but that's not my first priority. My first priority is to serve you in the long run.

And my strong view is real-time 3D is going to be without doubt the largest form of media on the planet. Most games are built that way today. But very few of the movies that you watch, very little of the social media. You don't go to your doctor and look at a real-time 3D model of your heart, you should.

I can give you dozens upon dozens upon dozens of use cases that will move into the arena of real-time 3D. And if I start framing for you what I see on the horizon with some of the hardware, you will believe me even more. So I believe we have a market that will double, double and double again. And I believe we have an opportunity to establish for Unity north of a 75% or 80% market share in the fullness of time.

And that the best use of our mind time and the best use of our investment is to build toward that outcome. Yes, pricing is easy, and yes, we will do it at some point, but I've watched short-term greedy lead to lesser long-term outcomes. And I want to focus on the right long-term outcome to best serve our customers, our employees, and our shareholders.

Richard Davis -- Vice President, Investor and Strategy

Ryan at Bank of America Merrill Lynch, are you on? OK. Well, we'll circle back to Ryan. Mario? Would -- Mario Lu at Barclays.

OK. There you go. Go ahead.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Hey, guys, thanks for taking the question, and congratulations on the first quarter out of the gate. This is more a longer-term one for John and then I have a shorter-term one for Kim. So Unity really stands out in the gaming space with the seat license business model. And I definitely appreciate those benefits.

But one of the most common questions we get is, why doesn't Unity command a larger share, the economics for mobile games as you think about in-game transactions? I know Kim touched a little bit on this in her prepared remarks. But how much consideration do you and the Board give to a business model that will allow you to capture, not just Unity ad revenue, but perhaps total revenue by developers?

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So you should have been in my last Board meeting. It was a central point. And there are parts of that Board meeting I can share with you and parts of it that I can't. So you're correct in saying that our take rate in gaming overall, if not high.

It's about 0.4%. When I talk to people in the industry, they have a mental picture that it must be at least 2%, 3%, 5%, 10%. I don't think they're wrong. I'm not telling you I can get there tomorrow.

I have the benefit of having been involved in publishing north of $40 billion worth of games in my life. And I tell you, the one thing I hated more than anything was a royalty model or a rev share to a toolmaker. And in fact, I blew every deal up that ever looked like that. And I was on the buy-side of Unity many years ago for their first commercial customer and encouraged them not to do that.

It's a particularly unfriendly model when it comes to content creating tools. You don't want to give Photoshop a royalty on your photo if it ends up in some large social media outlet. You don't feel like you should owe them a percent. But suffice it to say, if you take a look at what we're trying to do with now cloud content delivery, what we're doing in hosting, what we're doing on monetization, what we're doing, and you'll see many more tools that will allow us to generate new users within our development teams to bring more revenue onto the platform.

I have every ambition to do exactly what I said in the roadshow. As I said, I believe we can increase our business in gaming as much as 10x. And that's what we're after. So for clarity, I 100% agree with the sentiment, and I want to get there one brick at a time over the course of the next handful of years.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Yes. That's very helpful insight there. And then just a quick follow-up here. I believe in the S1, you guys talked about how a good percentage of your Operate Solutions revenue comes from Create customers.

Can you speak to the overlap during this quarter? How that trended versus maybe some of the disclosure you guys gave in your IPO filing.

Kim Jabal -- Senior Vice President and Chief Financial Officer

Sure. I can take that one. We're not going to republish those specific metrics every quarter. So I would direct you to the S1 in which the overlap was 55% of our customers over 100k that are using both Create and Operate.

And I can just say that that really will be -- that will continue to be a growth driver. And it's tied, obviously, to the expansion rate, which as you saw, came in really healthy this quarter. I think you should assume that the power of the platform here and the real growth driver is that expansion of our customers across Create and Operate, whether they start with Create and then expand to Operate or vice versa. And we continue to see this behavior in Q3.

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Appreciate it. Thanks, guys.

Richard Davis -- Vice President, Investor and Strategy

OK. Now Mario, if you're around. Mario Lu with Barclays.

Mario Lu -- Barclays -- Analyst

Great. Congrats on the quarter. And thanks for taking the questions. So the first one is on gaming.

So Unity, we all know, you guys are pretty strong within mobile and more casual titles like Among Us and Fall Guys, with those two titles reaching the top of the Twitch charts in recent months. With that being said, the next-gen titles, the PS 5 launch today, the Xbox launched two days ago, so can you frame what your thoughts are around the next-gen console? Whether Unity is better positioned within gaming within this cycle compared to the last?

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So, yes. In the last cycle, if you broke the market down into Xbox, Nintendo, and Sony's platform, our respective market shares were in 30 to 40 on Sony and Microsoft and about 70 on Nintendo in terms of the content that was built for the platform. If you further added a dimension to the market share graph and said, split out the AAA from the AA, split out the network titles, or the live titles from the [Inaudible] that has its own television budget in terms of marketing. So splitting out the titles we know.

Of those titles, the AAA, the Grand Theft Autos of the world, the Assassin's Creed, Battlefield, FIFA, Call of Duty, these titles totally dominate the charts on the console. The vast majority of them, 90% or so, are built on first-party, or in this case, third-party tech, meaning, it's the game engine from Activision, the game engine from Take-Two, the game engine from Ubisoft or Electronic Arts. So against that backdrop, neither our competitor, Epic with Unreal nor we have a material business on the AAA end. And they were ahead of us in this cycle, probably 3x our position, and neither of them in double digits.

And so we are both rounding errors with AAA, but they were a bigger rounding error than we are. We've been working with Sony and Microsoft for more than two years on this generation. We're working with -- we don't have attribution rights for all of this because some of the stuff is unannounced. But on the Xbox Series X and S, 7 of the titles that were announced slate titles were built in Unity.

On the PlayStation side, we're not allowed to even give you the number, but I can tell you that over 60 studios, we'll have 60 studios release titles for PlayStation 5. And if you included Quest, which I'm now starting to see as the early innings of the beginnings of an AAA title, it's almost 70% to 80% of the Quest tiles were made with Unity. And I think we're in a position on the console to gain materially in this cycle, but I don't think it's going to be over and out. I think this cycle intellectually or emotionally is still defined by the AAA.

My sense is that AAA will probably finish the cycle with the principal titles, somewhere between 6 and 7 out of 10 being homegrown tech, and the balance split between Unity and Unreal. And while that may not sound like the most optimistic thing in the world, you wouldn't have put us in the sentence last time around. So we are gaining on all fronts, and we expect to continue to gain on all fronts. But when you're coming from no AAA and a good position on the AA to a much stronger position on AA and the beginnings of a meaningful position on AAA, that's good progress.

Mario Lu -- Barclays -- Analyst

Got it. That's very helpful. And then just have a follow-up on the fourth-quarter guide. So I believe on the high end, on revenue, it's guiding for 9% sequential growth versus 20% historically in the fourth quarter.

So I think, Kim, you mentioned this in your prepared remarks, that player engagement is expected to fall a bit in the fourth quarter, and there might have been a pull-forward of demand. But I guess when you consider the second wave of COVID potentially in the west, why do you think that would be the case? Is there anything else embedded in there? And then any additional color you can provide on the 4Q guidance by segment? Thank you

Kim Jabal -- Senior Vice President and Chief Financial Officer

Yes. John, let me take that one.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Please.

Kim Jabal -- Senior Vice President and Chief Financial Officer

So a couple of things at play. So first, when you look at Q3 to Q4, Q3 was one of our strongest quarters. So it's a bit of a tough comparison. And what you noted is slightly off, but important to understand, which is that we don't expect user engagement to decline.

But normally, we would be projecting a very strong seasonal uptick within Operate because of end-user engagement. And as John noted in his -- I think in an earlier question, actually, users are already at home, and so they're already engaged at levels we've never seen before. And so our projections for Q4 are assuming that it's that normal seasonal holiday uptick has already happened. They are already at levels of engagement that would normally be a seasonal increase.

And so that's what we baked into our Q4 guidance.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Another thing to keep in mind is that we're in the middle of a -- it's built-in our guidance reasonably so as to best we can estimate and estimate. Console cycles when they first hit are often very additive to the industry as a whole. And they often take the same -- the heavy spender in mobile is also a console user. And so we'll probably see some shift in hours of gaming play or game consumption toward consoles this quarter.

If they can get them. I still don't have a PlayStation 5. I got my Xbox. My PlayStation in theory on the way, my R&D team gets some first.

But these are really well-articulated and really smart launches from Sony and Microsoft. But I think they've done an amazing job of learning from cycles fast. I've never seen launch slates this strong. And so -- I mean, I remember PlayStation 2, where you had pretty much a firework simulator, nothing else to do.

You bought it for -- because it looked good under the TV. Where we are right now, I think they've pulled out all the stops, they're brilliant launches. In the fullness of time, we'll benefit from that because of our larger position there. But very near term, I expect there to be -- the noise around the cycle, the noise around this holiday is likely to be AAA and console.

Richard Davis -- Vice President, Investor and Strategy

Andrew Uerkwitz at Oppenheimer, are you on?

Andrew Uerkwitz -- Oppenheimer and Company -- Analyst

John, if you have a 3080, I'll trade your 3080 for my PlayStations. I can't find those anywhere.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

If I don't have a better contact for that I would be embarrassed. But I'm not going to a retail store, I mean who would have a chance. It's [Inaudible] all day.

Andrew Uerkwitz -- Oppenheimer and Company -- Analyst

Just my question was, you -- obviously, there were several big games this last quarter using build on Unity. But oddly, I found it strange as some of them weren't using all of your Operate tools. So I'm just curious why somebody would use your Create tool, make a live service game, and not use Unity Vivox or some of your other Operate tools.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

I mean I wish it were the way you imagine it, and it will be the way you imagine it in time. So the life in a game development studio, how do I describe this? There are different chiefs responsible for virtually every one of the decisions today around hosting, voice, analytics, game development, whether you plug in special tools to augment a piece of a game engine. And the -- those chiefs in terms of the titles that are being introduced now made their decision on the game engine and hosting probably two years ago. So the strength of our push to get people to buy against the full platform is a lagging indicator of how well we're doing when you look at the titles that are being released today.

So I would argue that what we're getting in terms of the cross-sell on the release of the title today is less than we're getting on what we're selling now for titles that will come in the future. So I see the progress. And of course, two years ago, we didn't have multitudes of these services. And so the answer to your question is we're gaining, but the gain is on something you can't see.

And that's frustrating to me, but it doesn't go faster. Now there are some things that we're going to do that I think will give you a better understanding of why I have confidence in that working. So using, by way of example, our hosting service. Our hosting service for no product release in the market today has ever been achieved as a consequence of building the game in Unity, signing up for hosting, and launching the game on Unity's back end.

That hasn't happened once yet. We're in the same shop. We sell them, and they buy our hosting service. We're starting to get sales on just that model now.

A big part of our articulated in the public road map is the networking code. And we have a very rich strategy around networking them that I will not dive into today. But trust me, it's a very complex subject. That networking code is the bane of most game development studios.

It is hard. It is irritating. They all build it custom with a rambling set of tools available from a variety of suppliers. That will be a push-button in the editor and for many use cases in the 2021 time frame.

That push-button will make it incredibly easy for testing 1, 2, 5, 10, 15 people on your team using Multiplay hosting. By the time anyone sees an AWS, a GCP, or whoever else we might be competing for the back end on that particular game, by the time they're aware this game exists, they've already been running on Unity for a long time. And so we have a lot of advantages coming from our position as the editor and being able to pull them together in one service. And that's exactly what we're doing, is we're setting up an end-to-end service to support our customers because we think we can do it better than a set of solutions that they might pick one at a time from different sheets on different teams.

So thank you for thinking of us as the platform that we are but have yet to prove as much as I know we can and will in the coming years.

Andrew Uerkwitz -- Oppenheimer and Company -- Analyst

I guess my follow-up question because I appreciate the idea of everybody's creator. And so as I think about games and society, I think Metaverse versus how -- what's the monetization opportunity there? Is it just on the Create side? Is it on Operate? Is it on both? How should we think about the future of platforms?

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Well, so you mentioned Metaverse. I'm just going to start by putting a little pin in that. I'm a giant believer in the Metaverse. I'm also a giant believer that's already here.

Today, I played a couple of games. I read the news about the political environment. I read a lot of some news that's going on in some of our markets around the world. I communicated on Zoom, Slack, email.

I got WhatsApp notices from notes from a bunch of my folks in Asia, I made a cellphone call. And I visited a couple of dozen websites. I'm already in the middle of the Metaverse. What's going to change in years to come is that Metaverse will be increasingly real-time 3D.

I saw some of Unity's future road map products, for showing exactly how your Metaverse can collide with my Metaverse in this environment that I think we'll yield the answer to your question, which I will now finally give you. The answer to that question is, where we're going to generate revenue? We have a lot of growth on seats, in ties to the teams that are building in Unity. The opportunity is borne to the fact that in a typical team if it has a couple of hundred people, we might have 70 seats. And we have the opportunity to grow with that team up to 200 seats.

And our press there is we get network engineers we don't have with our networking code. We get artists as we put out more on the side of visual scripting. Our Collaborate software will encourage people to get to 100% of their seats on Unity. And those teams are growing.

And then there are the other half of the teams we don't have. And so there's a lot in seats. We're also creating something that I'm not going to take a ton of time to dive into in a moment, but one-time applications, built on top of Unity. Think of Reflect for game developers that would be incrementally sold to them for content creation.

And so we have more tools coming to support the content creators. And if we are, I don't know, a quarter penetrated or a fifth penetrated against the current opportunity, that we have realistic, achievable near term. On the Create side, we're a couple of percents or 5% penetrated on the amalgam of all things Operate. And so we expect a lot of market share growth on the Operate side.

Hence, my sense that we can still 10x our business in gaming.

Richard Davis -- Vice President, Investor and Strategy

OK. Brent Bracelin?

Brent Bracelin -- Piper Sandler -- Analyst

And I'm going to start actually with Kim and then a quick follow-up for John. Kim, on the Create subscription revenue side, it was surprisingly strong, pretty healthy acceleration to what, 46% growth. How much of the acceleration was driven to seat expansion in the gaming side of the business or some new gaming big wins? Or was it predominantly tied to beyond gaming and some new wins there? Just any color on what drove acceleration in that subscription component of the business.

Kim Jabal -- Senior Vice President and Chief Financial Officer

Sure. So I think it's probably worth stepping back a minute and remembering that on the Create side, we did have a modest impact. We had COVID headwinds modestly in Q1, starting in Q1 in Asia, and then falling into Q2. And so when we look -- when we go from Q1 to Q2, you see an improvement.

And some of that also was as we added finger food to our portfolio, and that helped to drive growth within verticals. And then as you go from Q2 to Q3, we really saw a recovery. To answer your question, it was both. It was both gaming and new verticals.

We just saw this slowdown in Q1 and Q2 across the board where larger, more complex deals were slower to close. And particularly on the gaming side, there was an adjustment as developers had to figure out how do they get all these pretty high-performance machines into their homes. And there was a period there where developers were a bit adjusting to the COVID world. But by the time we get to Q3, we really saw the recovery in seat growth in our pipeline, and that applies to both gaming and new verticals.

I think also the products that John mentioned, we had two releases of Reflect in the quarter, so that helps on the vertical side. And we're going to continue to be rolling out these apps to drive the growth in vertical. But very specifically, to answer your question, it really is across the board that we see the growth, the acceleration in growth in Q3.

Brent Bracelin -- Piper Sandler -- Analyst

Good to hear. Is this the new normal? Or do you think this is just a bit of a catch-up, too? Or a little too early to say?

Kim Jabal -- Senior Vice President and Chief Financial Officer

Well, I think we believe we will continue to have strong growth. So I'm not sure exactly how to answer that question, but some of it is yes, catching up from maybe delays that we had in Q1 and Q2. But it's also continued strength. And for all the reasons that John actually just spoke about on the gaming side, as we've built out across teams, new use cases, artists, networking code.

And then on the vertical side, as we continue to expand across different verticals, adding new customers and developing these products, these applications are really helping to drive the growth in verticals.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Just to build on that just a little bit. Kim and I always like to articulate are we see long-term strong growth. Sometimes, in our business, it's a little tougher to tell you what's going to happen next quarter, not this coming next, but it's easy, but two quarters out exactly. And part of the issue is when your business has got as much opportunity as we are, we've never guided you to think of us, and I know we haven't been guiding you that long, but to think of us as being incredibly predictable.

We've got some aspects of our business will move a little -- they continue to expand. But we have a lot of new product growth-driven, and we expect that to carry us forward in the long term. Super robust growth long term, challenging to tell you exactly the nuance of it day-to-day.

Brent Bracelin -- Piper Sandler -- Analyst

That's helpful. John, just a quick follow-up here. My Xbox did arrive yesterday as well, too. But I'm doubtful that my 10-year-old is going to hop off his Minecraft and Roblox.

And now this new among us shelves -- among us app, that's very proper with his friends. My question has to do with downloads. 3 billion monthly to application downloads, I think in June. Now you're talking about 5 billion application downloads in September.

That suggests downloads are accelerating faster than revenue. And I think you touched on this a little bit before, but how should we think about app download momentum? Is that a leading indicator that we're seeding the market with a future long-tail opportunity to monetize? And now it's on you to figure out how to monetize it? Just help us understand that acceleration in downloads that we're seeing, that's growing faster than revenue and the opportunity to monetize it long term.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So first, I'm going to address your children, if you don't mind. So I can remember wandering around Disneyland with my daughters when they were in elementary school. And they could recognize all the characters and -- from the seemingly 1,000-yard spot a princess and name them to -- and they could sing the song of all the princess movies. That's not who they are today.

They graduated from that. And I believe if your kids are engaging in the side of Minecraft and Roblox that has them engaging in content creation. They are exactly my future consumer. They will want to graduate to something that is not as complex as the current Unity Editor.

But take a look at what we've done with LEGO, take a look at what we've done with Reflect. These are a handful of buttons when you're a content creator. And my sense is there is something there, something sizable there. So you don't have to agree with me because that's not my forecast.

So we can debate whether it's there or not. But I have high confidence that it is there and that we will tap into it in the years to come. There will be a point that they want to graduate and move on to things that are more powerful and more capable and less childlike. Your question about the 5 billion downloads, it is much as that may be a shocking number, that's the average this year.

So we've seen some sharp increases. I think a lot of that is COVID-related. People have been downloading more applications and discarding more applications. We haven't seen as much growth in monthly traffic as we've seen in the number of downloads.

So my sense is a big chunk of that is an indication that users are trying more things. I think that's good. It's a reasonably healthy indicator. It's also a really great indicator for Unity, but no one's really getting into our space or in our grill.

It's just frankly a stunning number. It dwarfs even the mega caps in terms of how much their applications are downloaded on a monthly basis. So we're in a league on our own in terms of how much our ecosystem is being planted. The problem is it's not valuable.

It's planted 15 times on your phone. It doesn't get incrementally that much more valuable. But it's just an indication that from a market share perspective if you define it as the principal game is being downloaded on a global basis, there's really nothing out there like Unity.

Brent Bracelin -- Piper Sandler -- Analyst

Thank you.

Richard Davis -- Vice President, Investor and Strategy

And last but not least, Tom Roderick.

Thomas Roderick -- Stifel Financial Corp. -- Analyst

Outstanding. All right. Hi, John, hi, Kim. It's great to see you.

Great to hear from you. And Richard, if no one else is going to say it, I'll be the one. The gaming chair is electric.

Richard Davis -- Vice President, Investor and Strategy

You like that, yes.

Thomas Roderick -- Stifel Financial Corp. -- Analyst

The earnings calls would have been more comfortable. Well done. John, I wanted to just briefly address the commercial side of Create. Really, I know Forma is very early, but I think it's an excellent use case add-on that creates yet another element of what 3D brings to the table.

Automotive has been a great early starter for you guys on the commercial side. And would love to just hear a little bit more about how the e-commerce shopping angle of commercial might be changing the use case for 3D. Of course, where Carvana is changing the nature of the game of car buying and car selling, and they're incorporating a lot of 3D themselves. Talk a little bit about -- maybe it's auto, maybe it's luxury goods, and how the use case might be changing as part of what's helping Create to gain traction outside of gaming.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

So first off, Forma. There's a version of Forma that's in development now. I guess I'm putting on another new product release as I speak about this. But it is designed to augment Forma in another version.

So to back up, it's staggering how many companies sell things to other people. And that used to be done by showing up with your briefcase in hand and/or demo and/or some way of brochure, some way of convincing somebody that they ought to buy something, and showing them how it works and giving a better sense of its benefits. My core belief is that that's a -- the market of selling stuff to other people is massive, and it's not going away. And the next aspect of selling stuff to other people is -- I don't think we're ever going to go back to the days where all of this is done in person.

And we believe Unity can be used in Forma and then a companion product that will come out later to essentially make it so that you can sell by a way of Zoom or through our application better than you could in, person. And you could still use it in person if you want that human-to-human warmth. So I think that it's just another example where Unity can replace the brochure, the 2D demo, the video. We can replace the entire package and I don't care if you're selling a hospital bed or a car, and you want to configure a tractor or a surfboard, presenting it in a real-time 3D interaction -- the interactive environment is better.

No. I think the opportunity is there. And frankly, it's amazingly little energy on our engineering side. And my engineers are great engineers, so they get a lot done efficiently.

But it's not an enormous amount of work compared to the size of the market that we see. So that's why we did Forma, why we're adding to it. And the thing that some of you guys missed is like -- it's also -- there's a back-end sprinting component that we get paid for as well when people build some of these things. And car configurator is one example.

So it's two ways to win the model.

Thomas Roderick -- Stifel Financial Corp. -- Analyst

Outstanding. That's really helpful. That's great. Kim, if I go back to Operate, so totally understand and the angle that end-user engagement is not going to accelerate next year the way that it did this year, just logically, I suppose it can't.

But I'd be interested to understand how some of the add-ons on Operate particularly if I think about Vivox, Multiplay, how is the adoption of some of those add-ons working as end-user engagement goes up, as your customers lean into the Operate side a little bit more? Should we think about those components of Operate accelerating next year even if end-user engagement does not?

Kim Jabal -- Senior Vice President and Chief Financial Officer

Yes. So we're not giving guidance for next year, but I think, absolutely, we have a lot of optimism in the strength of the other parts of the Operate platform. So monetization is currently the biggest that's because it was the first. But we see really strong growth in Multiplay and Vivox.

And there are interesting opportunities as we go into other verticals to Operate solutions within verticals, and those are just really getting started. So I would say that, yes, the correlation between end-user engagement and the monetization business is -- there's a direct correlation there, I would say it's looser, certainly, when you look at Multiplay, to some extent, in that there's an opportunity there to continue to grow the set of solutions within Operate to continue to grow our customer base, right, outside of the actual end-user engagement. And that's the case for monetization as well, right? We're continuing to add new customers. We're continuing to expand because we're growing market share, right? So end-user engagement is one piece, one driver of growth.

But then you have our customers continuing to use our solutions more and more and more, taking market share, and then we're adding new customers. So those are other vectors of growth. And then importantly, continuing to build out that portfolio of products within Operate.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Yes. We just released, and we're getting some good early traction around content cloud delivery as an example. So we also continue to dimensionalize this with new services that are in large markets. And that's another example of a large market where we think we're competitively advantaged.

I think we're out of time. Are we not to close?

Richard Davis -- Vice President, Investor and Strategy

Yes, that's it. But the -- thank you very much. And John, if you want to conclude, that would be great. And we'll see you guys in three months.

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Thanks, all. It's great seeing you, all.

Kim Jabal -- Senior Vice President and Chief Financial Officer

Thank you.

Richard Davis -- Vice President, Investor and Strategy

Thank you.

Duration: 67 minutes

Call participants:

Richard Davis -- Vice President, Investor and Strategy

John Riccitiello -- President, Chief Executive Officer, and Executive Chairman

Kim Jabal -- Senior Vice President and Chief Financial Officer

Heather Bellini -- Goldman Sachs -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Bhavan Suri -- William Blair and Company -- Analyst

Ryan Gee -- Bank of America Merrill Lynch -- Analyst

Mario Lu -- Barclays -- Analyst

Andrew Uerkwitz -- Oppenheimer and Company -- Analyst

Brent Bracelin -- Piper Sandler -- Analyst

Thomas Roderick -- Stifel Financial Corp. -- Analyst

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