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Why Unity Isn't Worried About Apple's Ad Tracking Crackdown

By Evan Niu, CFA - May 13, 2021 at 9:00AM

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The mobile game specialist has been preparing for the change for two years.

Dominant mobile gaming creation platform Unity Software (U -6.63%) reported first-quarter earnings results earlier this week, which handily beat analyst expectations. The company even boosted its full-year guidance and now expects 2021 revenue to top $1 billion for the first time. The stock briefly popped after the report before the ongoing pessimism surrounding growth-oriented technology stocks again took hold and led to a sell-off.

Near-term volatility aside, here's why Unity isn't worried about Apple's (AAPL 0.60%) recent change to how it handles Identifier for Advertisers (IDFA), which has created shockwaves throughout the broader advertising industry.

A group of kids playing games on their phones.

Image source: Getty Images.

Unity has been preparing for this for years

As part of Apple's pro-privacy push, it rolled out a change in iOS 14.5 last month that explicitly asks users for permission to allow apps to track their activity across other apps and sites for ad targeting purposes. The change has been a long time coming, and Apple previously delayed the deployment due to concerns among mobile advertisers and smaller developers that rely on ad revenue to monetize apps.

The uncertainties related to IDFA have been an overhang for Unity ever since the company went public in late 2020, but investors are now getting a clearer picture of the potential impacts. Different companies will experience varying levels of impact from the change, which is expected to reduce the effectiveness of ad targeting and hence marketers' return on investment (ROI). Further stoking fears, recent estimates from Flurry Analytics showed that 96% of iOS users are opting out of ad tracking.

Unity has two primary business segments that are highly complementary, Create Solutions and Operate Solutions. The former provides a set of creative tools such as Unity's 3D gaming engine, while the latter helps developers actually operate and monetize the end product on an ongoing basis after the content is created. Since many mobile apps and games are free, Unity helps developers monetize their content with ads.

Unity pointed out that it has been preparing for the IDFA changes for two years, including developing a contextual ad model that does not rely on IDFA. Instead, the company can leverage in-game data to deliver relevant advertising while still adhering to stricter privacy settings, as many consumers opt out of ad personalization.

On the conference call with analysts, CFO Luis Visoso noted that Unity's platform analyzes 15 billion app events every day, which translates into around 35 million app events every minute. Of those daily app events, roughly 1 billion come from iOS. This is the data that drives Unity's contextual model.

The finance chief shared customer feedback conveying how Unity's readiness and ability to adapt to the IDFA changes, thanks to the years of preparation, is far better than any of its competitors.

Dollars and sense

Let's put some numbers to the IDFA changes. In February, Unity estimated that the rollout would result in a $30 million hit to revenue in 2021, or just 3% of the company's initial sales guidance for the year. But thanks to strong momentum across the overall business, Unity just raised its full-year outlook -- by more than $30 million.

Unity is now forecasting 2021 revenue of $1 billion to $1.02 billion, an increase of nearly $50 million at the midpoint compared to its previous outlook. The driver of the raised guidance is momentum in the Operate Solutions segment. 

"So IDFA [changes] will most likely impact the ads industry," Visoso added. "But we believe that our data and analytics advantage, plus this advanced preparation that I was mentioning, positions us very well to manage the IDFA [changes]."

Evan Niu, CFA owns shares of Apple and Unity Software Inc. The Motley Fool owns shares of and recommends Apple and Unity Software Inc. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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