So why is Unity $U down so much?
You'd be surprised by how STRONG certain parts of the company are.
And how FRUSTRATING the thing holding them back is.
Here's what happened
Top line: MATCH
This is way more impressive than you might think given the major headwind that popped up
Margins: decent, but stock-based compensation was way too high given the headwind was self-inflicted
Here's a big story: FCF is now **POSITIVE** on a TTM-basis. The reason: deferred revenue booming.
The good news: Big Customers continued growing briskly
The good news: Dollar-Based net expansion continues to be well above my own hope of 120%
BUT
Here's where the trouble comes in:
There are two segments:
CREATE: subscription revenue that can only grow with new customers or upgrades, so it grows more slowly
OPERATE: because it's usage based, this grows much faster.
At least that's how it usually works...
Create **WAS** growing at a healthy 32%
But it TOOK OFF with 65% growth this quarter.
Why?
This is by far the most important thing for Unity bulls to see
And Operate was really strong heading into Q1
And yet growth slowed to 25% in the first quarter.
Why?
This is a problem: Management noticed Operate revenue slowed dramatically. That forced them to dig under the hood and see what happened
Here's what happened:
When they dug under the hood, they realized they fed BAD DATA to its machine learning algorithm
That matters because the Algorithm places ads, which help ppl monetize their games.
That algorithm is now RUINED, and needs to be rebuilt.
Cost: $110 million
They're saying the right things to fix the problem: taking the next six month to rebuild the algorithm from scratch.
But the outlook is WAY lower than analysts were hoping for as a result
So what to look for going forward?
If management can take this mis-step and fix it well and soon, that's a sign of ANTIFRAGILITY -- getting stronger from stress
If this is the tip of the iceberg, it's starting to show cracks
@tigerstars
@tigerevents
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