In its first earnings report under Matt Bromberg, the new CEO of Unity Software (U +2.37%) slashed the company's guidance for the year and looked to reset expectations. It is the next step in trying to turn around a company that has seen its stock slump over 60% in 2024.
Let's take a close look at Unity's most recent earnings report and the potential for a turnaround.
NYSE: U
Key Data Points
Slashing guidance
Things started to turn south for Unity last fall when the company tried to introduce a new pricing structure that featured a "Runtime Fee" based on the number of users installing games built using its development engine. Customers revolted, and the company eventually had to walk back its plan, but the episode left many game developers angry and unwilling to trust the company.
Unity then tried to restructure, cutting about 25% of its workforce as it exited money-losing businesses. After that, it set out to refocus on business segments that would create the most value for its customers while being profitable.
Unity's recent guidance cut marks yet another reset in the business.
Turning to the company's Q2 results, its revenue fell 16% year over year to $449 million. It said revenue from its core strategic businesses were down 6% to $426 million.
Revenue from its Create Solutions segment, which is the platform developers use to create games and other apps, rose 4% to $128 million. Within the segment, the company's industries business was its best performer, growing revenue 59%. This business caters to nongaming customers looking to create augmented and virtual reality experiences and apps. Gaming subscriptions, meanwhile, grew 14%.
Its Grow Solutions segment, meanwhile, saw revenue fall 9%. This is an advertising business that helps gaming app operators acquire and monetize customers.
Looking ahead, the company reduced its full-year revenue forecast to a range of $1.68 million-$1.69 million from an earlier outlook of $1.76 million-$1.8 million. It took its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) guidance down to a range of $340 million to $350 million, compared to $400 million to $425 million previously. It said the lowered guidance stems from a more cautious outlook in the recovery of its Grow Solutions business.
Image source: Getty Images.
Can the company execute a turnaround?
The new CEO, Matt Bromberg, cleared the deck with Unity's guidance revision, which should give it time to implement its plan to improve its products and win back customers. However, this will not be a simple task. Unity's game engine (Create Solutions) has proven durable, although the company angered its customers with last year's "Runtime Fee" debacle.
Perhaps the biggest problem, though, is with its ad business (Grow Solutions), which is really getting its lunch eaten by AppLovin (APP +3.70%). AppLovin has seen tremendous growth in its competing software platform business over the past year, starkly contrasting Unity's weakening business. While AppLovin has helped grow gaming spending, it also appears to be taking shares away from Unity.
Trading at a forward price-to-earnings ratio (P/E) of 19, Unity's stock is not overly expensive if the company can mount a turnaround. However, AppLovin is trading at a cheaper valuation and projecting around 30% revenue growth next quarter -- compared to the 4%-6% Q3 core business revenue decline that Unity forecast.
U PE Ratio (Forward) data by YCharts
Setting a low bar and jumping over it can help drive a stock in the near-to-medium term, so Unity could have some upside if it can continue to beat low expectations. But right now, I'd prefer AppLovin in the space given its recent strong growth, execution, and its cheaper valuation.
