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Vector Ads Lift Unity to First GAAP Profit: Rapid Earnings Reaction
Key Points
Strategic Grow revenue, Unity's ad business, rose 90% to $432 million.
Free cash flow climbed to $220 million from $151 million a year ago.
Fourth-quarter guidance calls for Create growth of just 4% to 6%.
Unity Software (NYSE:U) earned its first GAAP profit since going public, $122 million, as revenue rose 32% to $622 million. Shares jumped about 17% in pre-market trading. Vector, Unity's AI ad system, has made its ad tech business the company's growth engine, and guidance says that pace isn't fading yet.
Key numbers
- Strategic revenue: $597 million, up 59%.
- Strategic Grow (ads) revenue: $432 million, up 90%.
- Strategic Create revenue: $165 million, up 11%.
- Free cash flow: $220 million, up from $151 million.
What it means
Vector uses data from games built on Unity's engine to place ads better. Better results draw more ad spending, and each extra dollar of it costs Unity very little to serve. That's why the adjusted EBITDA margin reached 41%.
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Part of the GAAP profit is accounting, though. Unity wrote down acquired assets earlier this year, so it now books less amortization on its income statement, the yearly charge against those assets. That cut costs by about $49 million versus last year, though strong cash flow shows the gain isn't only on paper.
The weak spot is Create, the engine subscription business that feeds the ad side with new games. Its growth is cooling, and Unity guides for just 4% to 6% in the fourth quarter.
What to watch next
Watch whether Strategic Grow revenue lands in the guided $515 million to $520 million range for the fourth quarter. Also watch whether Create growth holds up.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Unity Software. The Motley Fool has a disclosure policy.