Unity Software Inc. (U) Q1 2021 Earnings Report, Transcript and Summary

…Abrupt start .... so with me on the call today is John Riccitiello, President, Chief Executive Officer, and Executive Chairman; and Luis Visoso, Senior Vice President and Chief Financial Officer. So as we did last quarter, we will open up with introductory remark by John and Luis. And then we will have -- we've collected and sorted questions from our analysts and the goal is as before was to help investors understand our business model and outlook in the most efficient way possible. And finally, time permitting; we'll have the last 10 minutes or so for panelists to ask additional questions. So let's go on to the safe harbor statement. I'd like to remind everyone the participants that during this conference call, we will be making forward-looking statements, including our financial outlook for the second quarter and full year of 2021, as well as, statements about goals and business outlook, and industry trends and market opportunities, expectations for future financial performance, and similar items, all of which are subject to risks, uncertainties, and assumptions. Now you can find more information about these risks and uncertainties in the risk factors section of our filings at SEC at sec.gov. We remind everyone that our actual results may differ and we undertake no obligation to revise or update any forward-looking statements. And finally, we will also be discussing non-GAAP financial measures today. And reconciliations between our GAAP and non-GAAP financial results and discussion of limitations of our non-GAAP financial measures can be found in our earnings press release which was issued earlier today. So with that, let me turn it over to John for some introductory remarks.

Thank you, Richard. And thank you everyone for joining us tonight for our fiscal quarter 2021 earnings call. And while society has and likely always will face many challenges, it's reassuring, at least in a large part of the world, to see some light at the end of the tunnel with regard to the COVID pandemic. At Unity, we remain focused on our North Star our guiding principle, which is that we believe the world is a better place with more creators. Our focus, as always, is to enable these creators and to help them succeed. Our financial results reflect the power of this theme. In Q1, we grew revenue 41% year-over-year to $235 million. This is the 10th consecutive quarter of 30% plus revenue growth. We believe the transition from linear 2D to real-time 3D is a transformative theme. And one of the most important changes in how creators will tell their stories and bring their visions to life. It's also one of the most important changes in how people interact with technology and many years. We support our customers on many platforms and in numerous geographies, and today are the only high scale solution for creating an operating real-time3D globally. We believe it's inevitable that a large portion of the world's creators will over time become primarily real-time3D creators. The role of interactivity through 3D in real-time is so much greater than with alternative forms of media. Our goal is to enable these real-time 3D creators or to use a popular phrase and enable in power much of the metaphors. We intend to enable this at extreme scale. Unity seeks to enable millions of endpoint locations both work with our create tools and our operate solutions. Now we recognize that we are in a privileged position relative to under other content creation tools, content built with Unity gives end users agency of what they see, the distinctive characteristic is a fundamentally different, more engaging, and we believe, better way to interact with content. And I think it's worth noting that there are many 1000s of developers that transitioned into productive 21st century jobs in part as a result of learning and using Unity. One of our key competitive advantages is we've built Unity platform to be relevant for a developer throughout their career from high school hobbyist to their first job, and beyond. We will continue to invest to enable more creators to join this 21st century economy. Now, what do I mean when I say scale the career throughout their career, but we believe that our commitment to R&D competitively differentiates us from less sophisticated platforms that aspire to catch up with us in terms of technology or market share? For example, with Unity you only write once and can publish anywhere. We build our editors so a full range of users for beginners to advanced developers can build real-time 3D applications. This means you can start with visual scripting, move to C-Sharp programming and for more advanced developers you work directly with Unity source code if needed. With these onramps for Unity, we enable creators to develop and operate many application types from games to car configurators to run high scale AI simulation. It's not easy to make the complexity of this easy. This is our role in our strategy to enable more and more creators to be successful. Technologies that support the successful growth in real-time 3D applications are quickly reaching scale, massive bandwidth with 5G, multi core processors, scalable AI, AR/VR devices, cloud compute and more. Now is the time for real-time 3D to scale across games, across industries and across user types. What was once 2D will become 3D back which was linear becomes interactive, and what was not real time become real time. As we saw when the cloud displaced on-premises, subscription replaced perpetual license, that's shift to real-time 3D has the potential for great multibillion dollar opportunities. Our vision is to ensure Unity is a once in a generation company, a true platform that enables creation and operation of real-time 3D applications at extreme scale. We envision a world where we have hundreds of millions of creators on our platform from consumer creators to professionals in gaming and dozens of industries. By executing on this vision, we believe we can build a company that delivers revenue growth of approximately 30% over the long run. Of course, businesses like life are not linear. So it is likely that some quarters and years will be higher or lower than we expect. But even so, we'll really have the opportunities in front of us make such a goal achievable. Let's move on to financials. First off, I want to thank Kim Jabal for all her contributions to Unity. I believe many of our new CFO, Luis Visoso. Luis worked at Palo Alto Networks, Amazon and AWS, where he oversaw significant growth in scale. I am thrilled that Luis agreed to step into the CFO role at Unity. Luis served on our board and joined us from a position of knowledge with energy and passion that drive the business. I know Luis will have a great impact on Unity and look forward to working together to continue to build this great company. With that, I'll turn the call over to Luis.

Thank you, John. And thanks to everyone at Unity for their very warm welcome. I'm very happy to be here. I believe that the opportunity in front of us is almost limitless as Unity enables the transition from 2D to real-time 3D in games and across industries. We deliver another strong quarter with excellent execution by the Unity team beating guidance and sweet expectations. Q1 '21 revenue of $235 million grew 41% year-over-year, with strong performance across the board. Pre revenue of $70 million was 51% year-over-year, operating revenue of $147 million was up 40% year-over-year, and strategic partnership revenue of $18 million was up 12% year-over-year. I'm particularly encouraged by the continued customer success. We had 837 customers each generate more than $100,000 of revenue in the trailing 12 months as of March 31, 2021, up from 668 a year earlier. And our dollar based net expansion rate as of March 31, 2021 was 140%, up from 133% a year earlier as customers expand their business with Unity. Our platform is a competitive advantage. Unity enables creators to develop and operate real-time 3D content, providing them the right infrastructure and tools to create and monetize their work. This platform enables us to attract new customers and expand our business with existing ones. Unity's customer base is becoming more diverse as we expand from games into other verticals. A good illustration this quarter is in our simulations product, which we show under create where we added customers in household appliances, Home Improvement, healthcare, aerospace and government. Q1 '21 non-GAAP operating loss was $23.4 million compared to $13.4 million last year, as we increase our investments in R&D and vertical expansion that we expect will enable future growth. Q1 '21 non-GAAP gross margin dropped from 81% a year earlier to 78% due to mix and higher cloud hosting costs. We expect to breakeven on a non-GAAP operating income basis, we think fiscal year 2023 and expect gross margins to fluctuate in this high 70%. Q1 2021 free cash flow margin of minus 43% was particularly impacted by the payment of our fiscal year 2020 bonus, higher payroll taxes mostly related to employee stock vesting, prepayments for software licenses, and increasing working capital as our business grows and a one time payment related to our real estate. We expect free cash free cash margins to improve significantly in the second half of the year. We have 4,389 employees at the end of the quarter, up 50% from last year's March quarter. This brings me to guidance. Given the strong momentum, we're raising our revenue guidance for the full year 2021 from $952 million to $970 million to now $1.0 billion to $1.015 billion, which represents 29% to 31% revenue growth year-over-year. This is an important milestone for Unity as few software companies scale to the billion dollar mark. And finally, as a reminder, our revenue guidance still assumes approximately $30 million of headwind related to Apple IDFA, which was implemented at the end of April. We're also narrowing our non-GAAP operating loss guidance for the year to $90 million to $100 million; we continue to see significant opportunities to drive long- term growth by investing in R&D and vertical markets. For Q2, we expect revenue of $240 million to $245 million, which includes two months of IDFA and represents 30% to 33% revenue growth year-over-year. We expect non-GAAP operating loss for the quarter to be between $30 million and $40 million. As we continue to invest in the business. In terms of share count, we're forecasting 329 million fully diluted shares outstanding for the quarter, and 334 million for the full year. In summary, [Tech Difficulty] through the year, with Q1 results above [Tech Difficulty] I'll turn the call back to Richard who will run through questions.

[Operator Instructions]

Great, thanks very much. So okay, we're going move into the Q&A section of the call. So when I say Unity we try to be innovative. And so what we've done, as I've said, is we've collected all the questions and sorted them out in a kind of a logical fashion. So instead of using 20 year old methodologies, we're actually going into the late 2020, mid-2020s. In any case, let's start with this. Let's start with some of the financials questions. So let's begin with our newest member of the Unity team, Louise, who joined as last month. So Bhavan Suri of William Blair asks, can you remind us of how you think about allocating operating expenses, sales and marketing, R&D, G&A and kind of between enhancing your existing portfolio and new products, and whether this is going into gaming or verticals kind of so how do we kind of allocate those things out? And how do we think about it?

Thank you, Bhavan. We're very fortunate to have many opportunities in front of us that it's good to have choices, right? We actually prioritize investments in R&D, as we continue to strengthen capabilities to capture the very significant opportunity in front of us resulting from this 2D to real-time 3D transition that both John and I've been talking about. But overall, our investment behind, we invest behind ideas that have the potential to build large solutions with attractive financials; we're always looking at the long term. Now we want to create value long term. As a result, we strive to do both enhance our existing portfolio and invest in new products in gaming and verticals. And we will do that creating leverage as we improve margins over time.

Great. So finance question from Luis. Gal Munda of Berenberg asks when thinking about the vectors of growth in the mid term, if you kind of had to stack rank, kind of the components, say, of monetization of freemium create customers, so new seats and gaming, things like that cross selling, new industries, how should we think about kind of the underlying metrics and how they grow and those kind of things and how we think about that?

Thanks for the question, Gal. And I think of this vector SaaS and not as, or, keep in mind that many of the capabilities that we -- that are required to win in games also enable us to win in other verticals. This means that while the customer use cases are very different, we have already built out that platform that is the foundation for real-time 3D content creation or application built. So we believe when you combine the head start that are platform gives us with a leading market share in several segments, you get this virtuous cycle that helps us build our growth across gaming and verticals. And the intense result is that we are able to cost effectively meet our customers, wherever they are in their journey from basic workflows to full blown applications.

Okay. A favorite topic for a lot of people IDFA. It's been on the mind of analysts for a while and investors. So let's dig into this. So Chris Merwin, at Goldman Sachs asked, on our February call, you suggested that IDFA would begin in the spring that would be about a $30 million headwind to your revenue growth this year, iOS14.5 came out April 26. So did that help your March quarter? And more importantly, kind of what are the implications or early indications in terms of your opinion on that impact? And what the play of land looks like? Luis, why don't you run with that one?

Thanks, Chris. This is a very important question. So let me try to provide you a little bit more details. The team has been preparing for IDFA for at least the last two years. I was part of several of these conversations as a board member before joining Unity. And I was always very impressed by the quality of their thinking. But now that I'm on the other side, I even more impressed and see the plans in detail. Let me try to dimensionalize this for you. Our operating organization captures and analyzes 15 billion in app events each day; you do the math, that's about 35 million in app events every minute. And we do this across 20 platforms. This includes roughly 1 billion in app events in iOS 14.5 each day; we believe that the ability to analyze these data positions us very well in the industry. So as we talk to the teams, there are probably five key takeaways that I would like to leave you with. First, our spending on our platform is very strong. There is a shift towards ROI based campaigns on our platform through audience pin pointer, which this is when advertisers determine the outcome that they want from the campaign, and we determine the right channels and price for them to achieve their KPIs. So that's point number one. Point number two, our contextual model, which very importantly, does not rely on IDFA is working well. We need to perform for our customers, even in a more privacy aware environment. You need this game engine leadership is a strength. And it provides us with deep context for our ads business. Third point, our scale and depth provides us access to a vast amount of end user engagement and platform performance data, which is the point I was mentioning earlier, it's about this 50 billion in app events every day across these 20 platforms. The fourth point, which is probably one of my favorite is the customer feedback we're getting is very strong, Chris. Let me read to you three quotes that -- which are coming from our customers quote number one, out of all our partners, we're most happy with Unity, as we're having a lot of problems with others. Quote number two, we partner with every single network available, and Unity's readiness and guidance are far above the rest. Quote number three, we work with every network and none of them are able to compete with Unity when it comes to iOS14.5 readiness and reactiveness. So if I look at everything with this customer feedback, I'm fairly confident that we're in a very strong competitive position. And the last point I wanted to make on this is we're raising our guidance by $50 million. And the driver of that increase is the operate business. So we have momentum, we beat Q1 expectations and are raising our forecast for the year. So IDFA will most likely impact the ads industry. 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. And we'll obviously keep you informed as we learn more.

Great, thanks very much. And then Bhavan Suri at William Blair asked an interesting question about what IDFA means to our customers, especially in terms of how user acquisition teams will evolve, and what role does Unity play in that transition? I'll take that one. And it's kind of an addition to what Luis just said, but basically, look, there's no question that IDFA is a challenge for a lot of creators and while Luis, outlined a lot of the levers, and ways that we can help our customers navigate, we were not under estimating the challenges that our customers and others in the ecosystem, including some competitors are facing. So in the short run, there's no question that it'll be a challenge for some of our customers. But in the long run, we believe the more innovative and nimble studios will come out ahead. And in that case, that's a good thing for the industry, because it'll make it stronger and more durable. All right, let's, let's rotate over to a macro question. And zoom out a bit. And another question from Chris Merwin at Goldman Sachs. He quotes as we start to see a broader reopening of the economy. Can you speak to the engagement trends of your customer base? How should we think about those trends impacting operate revenues as we move through the rest of 2021? John, why don't you take that one?

So it's clear you're speaking about end users, Chris. And what I would say is there's no question 2020 was a watershed year, consumers are enjoying gaming at levels that I might well have expected by the year 2025. And they visited us in 2020. So it's clear that certain behaviors move forward several years. Now, earlier, Luis mentioned, all those data points we have to address. We understand engagement, LTV; cost to acquire, literally in every country in the world, minute to minute, our data understanding is huge. And everything I see makes me feel like a big part of the left is permanent, people have changed their behaviors, they've changed the way they game, they've changed the way they look at gaming people have come into the industry. Now there's going to be some changes and the balance of our guidance this year does reflect some reduction and engagement in the activity associated with it. It wouldn't be prudent not to include that. But I think the other thing that's going to be really interesting this year is going to be exact seasonality. Normally, we would see a sharp left, as we go from say, October-November through to the next half giving holiday and in the Christmas holiday, kids going home from school, and that pattern will start to see that but we're indexing a year ago to a period where they were already at home for the entire quarter, point that I'm making is, I do think that not only was COVID, and the work from home aspects of this, really unprecedented and driving engagement. Point number one, if it's permanent. In some of the year-over-year, look backs are going to be interesting, because they won't be the normal, comparative seasonality that we would otherwise expect.

Right. We have a question from Bhavan Suri at William Blair, about data. So given that we have a large population using the Unity platform. Now this gives us deep insights into the customer kind of behavior and preferences. So as we kind of get these network effects up and running, how are we thinking about the opportunity to introduce even a marketplace for consumer's kind of drive recommendations based on friends that are playing, et cetera. So maybe, John, if you want to run with that?

Well, thanks for that question. It's one of my favorites. And what I've been talking about inside the Unity board room for seven years. First off, we're proud to say that over a third of the world's population is on our platform. And that's a substantial differentiator for our customers. And it really helps us understand our marketplace, and allows us to leverage network effects with game developers, right, better and more relevant marketing, contextual messaging, and the rest of it sort of supports the monetization. This was the thesis upon which we began our operate solutions business; we didn't want to be another buy low sell high arbitrage and monetization network. And those are the follow these markets have seen many of those undifferentiated companies fall to the wayside. What we've done well in this market is take our data advantage to better understand and build a network around the optimization of LTV versus CAC. So we understand the cost to acquire; we understand the LTV of our customers, we understand the interplay, and a level of nuance, it really helps us do a better job for our customers. And that's what our network really is. So it is a network effect, we count our MAUs to 3 billion, even our largest customers are rarely at a great month 10% of that. It's a massive advantage. Now to amplify on some of the data that Luis highlighted, we had 50 billion app events on over 20 platforms. And that's the important reason why we're able to develop these deep insights into customer behavior. We work behind the scenes to recommend what would be interesting or new to an existing customer based on multiple factors. And that's the core tenet and how we built our marketplace for consumers to drive recommendations.

Great. Now let's switch over to another part of operate, so operate beyond monetization. So Tom Roderick at Stifel asks so while monetization is a very good business, you also have several other operations or offerings under the operating umbrella. So how are we thinking about operate solutions beyond monetization, and kind of which areas are we most excited about in the near or long term? John, if you want to run with that?

Sure, I'm particularly excited about multiply, we plan to grow this faster than we'll operate, becoming a larger portion of the operate revenue mix. I believe it's a multi million more, let me say again, in time a multi billion dollar opportunity. It's cloud orchestration for real-time 3D, we put this business, I put this business under Ingrid and her team, who continues to do a great job running and operate. They're making it easier to self position, the streamline the pricing models, there's a concerted sales effort looks like it's paying off several large deals in the pipeline. And seeing the trend to move consumer is really resonating with multiplayer games, social displaying huge, they want you to get more success. We feel great about the multiplayer business in the long term prospects. The box is smaller, and it will scale faster and better. It's a best in class scalable voice service used in gaming. And it's been used by some of the world's best known games, new features and functionality are coming and going live in the second half of the year. And then we've got our cloud Delivery Network, it's, I think we're really on the right side of history here. A lot coming, I really feel confident that more user generated content, more content updates is going to drive increasing uptake there. I will admit that there's more features coming. And that's an important part of how we're going to scale it. So we continue to work new features internally. We look for tuck-in acquisitions to accelerate our growth in the space. But we really feel great about operator overall.

Great. Let's go over to create for game so Franco Granda at DA Davidson asks, as large triple A video game developers renew their focus on mobile gaming. Number one; has there been a tangible uptick and engagements? Number two how has Unity engaged with them, as they look to maximize not only the efficiencies of game development process, but also the monetization aspect. So John, if you want to run with that?

So the first point is we have seen more engagement from AAA studios, both for AAA games, and for the mobile games that they're building on the AAA intellectual property. We're seeing an industry an intriguing dynamic of last few years first; a lot of AAA studios are increasingly realized they need something different as they get into mobile. And they think about bespoke engines. But find it's time consuming, costly, and often a bit of a challenge, if not disastrously error prone. The path to commercialization successful game has changed. For example, when highly successful AAA franchise like Call of Duty come to Unity to use our development platform to build for mobile, they're getting there faster, quicker, better. And if you look at the charts, you'll see many of the world's largest, most successful mobile games are built on Unity. Secondly, we began to see some games start in mobile or in AA and then moved to AAA. And sometimes we have side launched successful game on Nintendo Switch and move that title to other platforms, whether that is a mobile or console title. And finally, with the rise of cross platform play, we've seen PC games cross over to consoles and vice versa. The value of using Unity's platform becomes even more obvious in these circumstances, cross play multi platform; right once published all platforms that are our bread and butter. That's what we bring to the table. And we keep up to speed on these platforms minute to minute, or day to day maybe it's not minute to minute. As they make changes in the technology stack. We're always there and ready. A big publisher sometimes doesn't have the time to keep up with a smaller ones never do. They're playing catch up with Unity; they're ahead of the game.

So Bhavan asked another question on the Create side. Your addressable market, Tam, addressable market for game artists as multiples of that of the programmer opportunity due to the shifting trends involving more artists at Game Studios. Could you update us on the progress you're making with penetration into the artist market? And what differentiates Art engine relative to what is currently being used in the market today. John?

Bhavan, thanks for that question. It's an important one. And a scenario we've made the most progress and realistically, also still have a lot of progress in front of us. Investments we've made in visual scripting, new rendering pipelines, and over a workflows are brought many artists under the Unity platform. And the early work done with AI augmentation for artistry, including what we provide with Art engine, also is bringing artists on the platform and for those of you who don't know exactly what I'm talking about. AI augmentation means that we're using the power of AI to essentially make an artist 10 times more productive or 20 times more productive because it completes a lot of the tasks. Getting finishes a lot of the work or enhances the work they would otherwise be doing by hand. Now, if you want more contexts on this, you might want to look at a case study. It's on our website, one of our AAA studios. It was featured for the GDC showcase. Insomniac, you'll see him there. It's a good read; it gets exactly to the question you're asking about. But here's the thesis. Artists are the most numerous creators of content in real-time 3D. And everyday we seek to serve them better, more tools, better tools.

Great. Okay, let's pivot over to kind of create for verticals. So Brent Bracelin, Piper Sandler asked, to what extent has the recovery and construction market been a tailwind for you? And how does visual live fit into that kind of go to market strategy, John?

So look, I guess I can say that the construction market recovery has been a tailwind. And it likely will be for some time but realistically, we're relatively nascent in these industries with more customers. So it's more a macro trend is really interesting and helpful. But it's really at this point growth is driven by case by case penetration with our tools with architecture and construction companies. For example, we continue to work closely with innovators like Sweden based Skanska, the fifth largest construction company in the world, we recently signed JE Dunn for site license for visual live, JE Dunn is a $5 billion top 25 construction company. And we have other wins in AEC that were not allowed to release. I wish I could. The point here is that we've begun to see the who's who would prospective customers in architecture, engineering construction. And what's driving us right now is penetration into existing business. And I guess you're in a better mood when they see their market growing. So maybe that makes it a little bit easier.

Great. Continuing on with another question from Brent Bracelin at Piper Sandler. He asks there's been a handful of new product releases in the last quarter tied to enabling AI, machine learning, robotic applications in manufacturing and industrial markets, via models, computer vision simulation, synthetic data, could you frame the broader opportunity in manufacturing and industrial market for these tools and others gone? John?

So I'm going to slightly reform -- reframe your question, but it could be held specifically to manufacturing and the industrial market. Our goal at Unity is to build a product portfolio to give us really an unbounded opportunity to expand beyond gaming. The key thesis is as we move from industry to industry, their needs are incredibly similar. They need what is core to our gaming engine. But there are a handful of additional needs that solve for use case after use case across industries. One thing about it, one way to think about it, computer vision use cases content for simulation and extreme scale for the training of AI models streaming with the particulars right for real-time 3D, say versus linear, which is quite different. The ability to resolve LRDs at level of detail on the fly. These are capabilities near inherent to Unity, were fairly easy to address, and they open massive opportunities in gaming and in many other industries. There are a few additional building blocks. Think of them as Legos and our toy box with capabilities. Like our tools for large team collaboration for version control for large amount of data that go with real-time 3D, that have us believe we are truly unbounded opportunity that at Unity we just the last few years has expanded our market presence and product portfolio pretty substantially. Today, many well known brands use Unity technology and AEC automotive, manufacturing, media and entertainment. And as you saw in our press release, we announced new customers in health care, government, retail, and look to bring real-time 3D to their customers and employees. We plan to keep investing in new features and functionality. Today, our portfolio encompasses our core Unity editor, but also forma for easy production of 3D content, reflect for AR/VR for BIM models, periods for streaming in real-time 3D experiences, HDMI for heads up displays bars for XR creation. But here's the thesis. There are a handful of additional tools capabilities on top of Unity that will essentially make us relevant for virtually any use case in and outside of gaming. And it's getting to this unbound opportunity that has me so optimistic.

Okay, we'll make this a trifecta. We'll have Brent Bracelin ask a question about how you are thinking about partnerships as you expand into other verticals. And I can take this, it's basically in addition to what John just said, look, up to this point, we've been seeding the market, mostly through our sales, but also working closely with our verified service providers. However, as John just referenced, we have a strong and kind of growing foundation in gaming that makes sense for us beyond gaming, it makes sense for us to kind of partner with a handful of global professional services firms. So stay tuned on that front. We don't have anything to say now but hopefully if we keep working hard on that, we'll do well in that regard. And then last but not least, Gal Munda of Berenberg gets the most interesting question award this quarter. Maybe we'll do that every quarter. With NVIDIA becoming, quote a new software company. How does the metaverse strategy affect Unity? And of course NVIDIA isn't the only company talking metaverse, EPIC, Roadblocks even big platforms like Apple and Google, Facebook and Microsoft has suggested that they too are metaverse. So could you help investors sort this thing out? And how does Unity fit into this? John, this is one of your favorite topics. So I'll let you run with it.

It's become a favorite topic for me, because I think that we have a problem with terminology where I'm not sure we're all talking about the same thing. And I'm going to try to define it in such a way that maybe can hold sway on our marketplace. Let me start by saying that I think of Jensen as a friend, and I don't see NVIDIA as a competitor. They're a great company, and we collaborate with them on a lot of things. So let me frame out some ideas. The first one is going to sound a little upside down. But I'd argue the metaverse is already here it's just really just another word for the internet. But better. And let me draw the clear distinction between them. And I want to be clear in spelling this out I'd argue that say for example, if I go online to buy a shirt like this, and the seller shows me a picture of a of a black or dark green button down. And I see a picture of that. I'm on the internet. I'm not really in the metaverse, but when I see a model in a scene, walking and turning in my direction, that model is me wearing this shirt. And I can invite my family to the same environment help me decide whether this shirt looks good on me or not goes well with a blue suit that I might be wearing. And I can invite family and they can be looking at me and laughing at me and laughing with me that I'm in the metaverse and let me define this exactly what changed. You've heard this from me before, 2D became 3D. Linear contents changed to real-time. My solo experience became social internet or an interactive in a phrase, it became real-time 3D. So what I think so many get wrong when they think of the metaverse is they see it as a competition. Is it whether roadblocks or Fortnite win. I see it very differently. There'll be millions of endpoints in the metaverse and these will include shopping sites, games, social networks, messaging apps, 3D conferencing, and job sites and constructions augmented by real-time 3D in the form of Unity reflect. We can get all these websites going millions of endpoints or destinations are the metaverse and it will expand in huge ways in years to come. And what we're doing is providing a lot of the underlying infrastructure to make this happen. Now, before I get into that, let me make this point even a little bit more clear. So back to the point I made about the metaverse today, just today, I played a few games made three online purchases with two online shopping sites. I participated in several zoom meetings. I connected with my family on FaceTime. I jointly edited document online, I visited an OMB website, and you get some data for presentation and making. I interacted with other people in businesses and six of the seven diverse continents. No one on Antarctica yet today. This is using the internet on full tilt. But more and more of these endpoints and destinations are changing from static 2D content to real-time 3D content. And as they do I believe they become part of the metaverse. The metaverse is, in other words, the more engaging, more interactive, more 3D, more real-time version of the internet. And it is happening now. So how will this metaverse come into existence in huge scale, as I predict, I see four major enablers. One of them is physical. These are the fiber optic lines of faster GPUs and stuff that Jensen and NVIDIA and provision of 5G, the satellite GPS systems getting better and stronger. The underlying infrastructure that it all relies on. Second are the underlying operating services enable real-time 3D hosting like multiplayer streaming, computer vision, monetization services. Third, there are the content creation tools, the real-time 3D tools. And lastly, there are those millions of endpoints. And these will include all the examples I've mentioned, and more. So today, Unity has the substantial majority of all the real-time 3D content created in gaming and an industry, we are the tool of choice for these endpoints. Unity is a substantial player, also an operate services. And as you know, we don't provide hardware and we don't make games. But if the metaverse has music, it's really playing our song. And so with this, we don't see in videos competition, we view them as a partner, and co conspirator where we could not -- we couldn't do it without them. The same with Autodesk and Microsoft and Google. We're in it together, building the future with the metaverse. EPIC, Fortnite, roadblocks, Microsoft, Minecraft are endpoints or destinations in the metaverse and we'd love to see them grow, proving the point. And if I were to reference the most recent presentations of the metaverse, the Oasis and Ready Player 1, a movie that use Unity and part of its production, I'd see these important rides in the theme park that will take us and make up the entirety of the metaverse. So thank you, Gal. Back to you, Richard.

Okay, great. Well, now we have open mic, it's like, open mic Friday, or whatever. But if you all have questions that you want to ask live, feel free to pop your hand up or whatever. So Otherwise, I'll just call on you. So if we have any questions, just hit the raise hand button. Maybe not. There we go.

Hi, this is Kenny. Hey, I just wanted to know, I had two questions you could address either one of them. The first was which of the services in create or operate do you think has the most room for growth right now that investors aren't paying attention to? And the second is does Unity ever plan to produce games like EPIC and Unreal do? So, yes, those are my questions.

Luis, why don't you take the first one, I'll take, the second.

Yes, John. Yes. I think in terms of the growth that we expect, I think John referred to a little bit about it, I think multi-play a scenario where we see significant opportunity for growth. But, frankly, I'm optimistic across the board. Now, as I said, in my prepared remarks, we've seen very strong growth across the company. And there is no reason why that's going to change in my view, after being here for a month, but I'm optimistic across the board, actually.

So, in terms of making games, it's come up a lot of times in the past, and the answer is no. Like, I don't think competing with your customers is the easiest way to win conversion. And honestly, I think it's one of the reasons why, particularly in mobile, where I think we have advantages over other engines that have competitive products out there. People don't necessarily want to trust the operation or the creation of their content someone they compete with. It's one of the reasons we've grown from, I don't know, low double digits low teens five years ago in market share and wasn't measurable back then it's our best estimate to 71% on the Christmas quarter this last year, we've been steadily increasing market share across the board. I think one of the reasons is our customers trust us inside their building with their deepest secrets, not worried that we're going to pop up and compete with them.

All right, I see a couple hands up. Mario, are you able to un-mute?

Great, thanks for taking the question. So just have a couple one on the full year guide. You guys be by roughly $20 million in the first quarter in terms of revenue, and raise the full year by close to $50 million. So just wondering, any positive trends to kind of call out thus far in April and May? The kind of that gives you this additional confidence?

Yes, I think overall, we're feeling good about the business. Now it's a little bit premature to talk about Q2, but we are confident enough on based on the factors that we discussed, right? Very strong Q1, very strong business across -- it's broad base, as I just mentioned, and our projections for the year look very healthy. So we are comfortable raising the guide by about $50 million that you mentioned. So that's where we are Mario, we are -- we're very encouraged with the health of the business particularly given the environment we're in.

Great and then just one on high level question. So I think last week, we were able to see the financials of one of your competitors in the 3D game engine space. So I think the two of you combined comprise less than 2% of total gaming revenue in 2019. So just wondering at a high level, what percentage you think would be fair economics offering game engine over time.

That's a tough question. And I think it's almost in a way self limiting. So I believe that it's pretty obvious that if we do a billion dollars this year, and you've got an industry approaching a couple 100 billion dollars, our take rate is under 1% in gaming, pretty straightforward. But as we expand the number of services and capabilities, some of which we charge for incrementally as we do in verticals and some in gaming as well, we can increase our take rate, led by the simple thesis that we add more value first. So it's not leveraging some sort of advantage on our customers to raise prices, although it's possible to raise prices, I think we're going to expand our take rate in a growing industry as we have and will continue to do as a consequence of adding more services more capability. There was a question earlier about AI and Art engine. If we can help make artists 10 times more productive, there's no reason developers won't pay for that one of two ways. Artists coming to the platform, which ended up itself, increase their take rate. And there are premium products and services we can provide around data training data, data and AI, which we also charge for. And so we have the ability to increase her take rate in proportion to the way that we add value, and we're increasing that value that we add across industries, but particularly in gaming every day.

Okay. Tom Roderick, did you have a question?

Sure. I'd love to. Can you hear me okay? Hey, I'm even giving a video here. We like in, hey, John, can you I know, this is a small deal. And I know they're not directly competitive. But it was interesting seeing Zynga make its own acquisition of a digital advertising marketplace. Would love your thoughts on other players out there that directly own, operate, build game title as opposed to having development platform, what you see as a response from the game developers, maybe it's a response to IDFA. But how you feel about that, and new emerging competitive marketing or digital advertising marketplaces.

So first off, I have to say, Frank is one of my favorite people on the world, you can quote me on that. So anything that he does, was saying I'm sure he's got -- he's been thoughtful and smart. The second thing he knows the situation with Unity is just really unique. We're -- we've got a beat on $3 billion users, we're increasing our ability to understand that user base, dramatically every quarter, that leads to competitive advantage for our customers, they come to us with their supply and or to drive their demand in order to make their brand yield more installs. We're really good at that. There was a time four or five years ago, where we were smaller than Chart Boost. Or four years ago, even there was a time not that long ago, where we couldn't possibly imagine competing with the major mega cap players in our space. And we've made up a lot of ground and gained a lot of market share, driven by competitive advantage in the way we do it. So we're never really worried about competition more amusing things I find is when I talk to journalists, they keep waiting for me to say something nasty about Tim, over at EPIC, I like Tim. I think they do really important things. I'm glad that they're out there innovating. I am sure that our business is bigger, because of the innovation they've done to bring us to our best competitive spirit and execution. I love competition. I also like winning. And so I like 41% quarters, and I'd like to string a lot of them together for you. It's on the basis of being competitive in the marketplace that we're going to succeed. And I was answering the last question I said, we increase our take right, by increasing the value we add. We're constantly focused on that. Short term, we can always maybe eke out a few dollars by messing around with pricing or messing around with other things that are hard to lap. Values add is easy to scale. And that's what we're investing at. And I'm highly confident in our monetization platform as part of our rate it's going to continue to win.

Franco, Granda, is you have your hand raised? Love to talk to you?

Thanks, I am right here. How's it going? Good to see the team. First, welcome, Luis. I've got a couple questions for you. So now you've had about a month to settle in, I guess, what are your first takeaways of the -- not only to the finance platform but Unity in general. And what are your main areas of focus that you embark on this next stage of growth?

Yes, great question. So the good thing is I knew what I was getting into, right? Because I was I spent some time at the board. It seemed like a long time, but he was like only nine months and I had a blast and every meeting I was in I was like, why am I sitting on the other side? They seem to be having more fun than I was. So decides to join. I think in terms of surprise is people are so passionate about winning here, nothing is impossible. You have a problem and everybody's smiling, which is not happening in every other company I've been part of. And they see problems and the solutions that we can bring to the table. And it's great. The other thing that's very unique and you see it when you're sitting at the board, but you can really see when you're part of the company is the culture. It's a company where you can agree and disagree, and everybody expects that expects you to be honest. And it's just a fun place to be. I think in terms of priorities to the other part of your question. I think it's about long-term shareholder value creation. And we do it by driving strong top line growth. I think that is the fundamental piece of that. But we also want to make progress in our margins; we want to make progress in our free cash flow. And we do want to do it in a way where we're always growing as fast as we possibly can. And to John's point earlier, we want to do -- we want growth to come from new customers, and expanding business with existing customers, right, and if we can get all those flywheels moving in the right direction, I think the possibilities are really limitless.

Thank you. So looking forward to seeing how that evolves. And then one last one. So you've got over $1.6 billion in cash, how should we think about capital deployments over the next year or two?

Yes, great question. I mean, as you know, we've always been acquiring a few companies here and there as we continue to find technologies that will accelerate our growth and which we can get at a reasonable price. And we'll continue to do that. And we'll continue to look at best ways of creating shareholder value, right? I don't think I can give you much more than that. But we're always looking at the best opportunities out there in the market for sure.

May have run through all the people. Brent Bracelin did you have any questions? I didn't know if you had any of them?

Yes, I did I thought. If you have time for one more, John.

Of course we do.

But I had a question really around King; you're calling out King as the first time they're actually building a platform here. And so my first question is, why now? Why did it take so long? And what's unique about that relationship with King and how meaningful is it? Who did you displace? And then two, Louis, could you just talk about R&D? And John, maybe weighing that as well, you are aggressively investing in R&D. I think it's 47% of sales this quarter versus 40% last year. Share with us, where are you putting those dollars to work.

So on King, first, I'll say a tad of an insider story, whether CTO join us on our most 2 ago, global town halls. And so describing how and why they got to the Unity platform. And it's interesting, if you look at King; first off, they're one of the most innovative creative organizations on the planet. And they're really good at business. So they make their decisions thoughtfully. And so when we get a quote from or get support from King, it makes us proud, they didn't get there by accident. And I think that also sort of a little known little bit of history here with King. Beside from being one of the most successful developers in the world in mobile, it was probably six could have been seven years ago. But in that timeframe, I think it was six, they announced that they were taking their mobile game engine and making it free to the universe of developers around the world, in direct competition with Unity, it's time they didn't use Unity at all. I have to say, that was a bad day for me, I didn't particularly like the idea we're trying to win their business and not lose it. I lost every opportunity to get there given that announcement. In the time that passed, they obviously gave a deep scrutiny. They learned what they needed to learn. They ultimately booted that strategy and started to use Unity on test products. And from there, more and more, they started using our products and services. And today, we have a deeply respectful relationship and a powerful one that we feel really good about.

I think to your R&D question. Yes, we are committed to continue to innovation, right? Because we're committed to growth. And we think that's what it takes. So as you were saying about 53% of our OpEx goes to R&D. And if you look at how much we're investing relative to our growth, obviously, we're generating leverage in sales and marketing. We're generating significant leverage in G&A, but we are investing in R&D and that's particularly to drive more of as you know we were expanding from games and now including more and more verticals. And although there is a lot of synergy, as I mentioned in my prepared remarks, there are some areas where we do need to continue to invest. So that's what's driving our investments in R&D. As I look forward, I will continue, I think we will continue to invest most of the incremental dollars in R&D. But we do expect to generate leverage, of course.

Yes, one thing just add on that question, because I think as an outsider, looking at any organization that invests in R&D, it always seems kind of opaque, R&D is a generic thing. Understand here at Unity, we have a really clear understanding of things. For example, the question came earlier about Art engine, across Unity, we've got a lot of AI people, and a lot of artists and R&D focused on building tools make artists more productive. I see a day not in the distant future where this isn't a feature and I am promising to developers out there, this is not happening today. But it's where we're going intellectually, and we're building towards, maybe they've designed redwood for an Elm for us. And so you take training data of a couple 100,000, or a couple 10,000 photos of Elm for us and you don't have to do any work, the AI transformed redwoods to Elm and all the surrounding infrastructure of a forest of that type. Or you start a river finishes a river. The point of it is, is that computers today are powerful enough to do so much more for artists and they're doing now. Now some of the things I've described are already possible, I could dazzle you if you came into the office and show you some of the things that are happening with some of the smartest engineers and AI technologists in the company. But we want to package those in such a way that they dazzled the artists so they can feel 10 times more productive. Across half a dozen priorities like that, we are very clear about what we're building, why we build it, how it connects to a community of users, and putting dollars and cents on it, how many of them there are and what they might pay for it. So we're really thoughtful about that. And it's what occupies a great part of my time, and that of senior leaders like Ralph, on the R&D side, Mark and Ingrid leading our operate teams and Jeff, our R&D leader. A lot of focus on just this question, right.

That's a good wrap up, it kind of explains, encapsulates what we do. John, if you have any follow up, or did you have any other questions, Brad, Are you good? Thank you. Bye. So John, if you have any wrap up questions, otherwise, we can stop here, whatever you'd like.

No. Thank you, everyone. Unless there's more questions. We're ready to go. And we'll see some of you on callbacks.

Thank you so much, everyone. Appreciate it.