Core Viewpoint - Unity Software Inc. (U) shows potential as a stock pick due to surpassing key technical resistance levels and positive earnings estimate revisions [1][2][3] Technical Analysis - U has surpassed the 200-day moving average, indicating a long-term bullish trend [1] - The stock has moved 20.3% higher over the last four weeks, suggesting momentum for a potential rally [2] Earnings Estimates - There have been 2 upward revisions in earnings estimates for the current fiscal year, with no downward revisions, indicating positive sentiment [3] - The consensus earnings estimate has also increased, reinforcing the bullish outlook for U [3] Investment Rating - U is currently rated as a Zacks Rank 2 (Buy), reflecting strong investor interest and confidence [2]

Group 1 - Unity Software Inc. shares have increased by 3.4% over the past four weeks, closing at $20.66, with a mean price target of $26.38 indicating a potential upside of 27.7% [1] - The average of 16 short-term price targets ranges from a low of $15 to a high of $35, with a standard deviation of $5.69, suggesting variability in analyst estimates [2] - Analysts have shown increasing optimism regarding Unity's earnings prospects, with a strong agreement in revising EPS estimates higher, which correlates with potential stock price movements [11][12] Group 2 - The Zacks Consensus Estimate for the current year has risen by 0.5% over the past month, indicating positive sentiment among analysts [12] - Unity currently holds a Zacks Rank 2 (Buy), placing it in the top 20% of over 4,000 ranked stocks based on earnings estimates [13] - While the consensus price target may not be a reliable indicator of potential gains, the direction it implies appears to be a good guide for future price movements [13]

Revenue Performance - Total revenue for the three months ended March 31, 2025, was $435 million, a decrease of 5.5% compared to $460.38 million in the same period of 2024[88]. - Create Solutions revenue decreased to $150.38 million in Q1 2025 from $163.67 million in Q1 2024, while Grow Solutions revenue decreased to $284.62 million from $296.71 million[92]. - The dollar-based net expansion rate as of March 31, 2025, was 97%, down from 101% in the prior year, primarily due to decreases in Grow Solutions revenue[84]. - The company expects revenue associated with non-strategic portfolio to decline further through the remainder of 2025, with approximately $34 million in Q1 2024 and $17 million in Q1 2025[92]. - The company is migrating a portion of its traffic to a new AI platform called "Unity Vector," which is expected to improve revenue performance in the future[94]. Profitability and Loss - Gross profit for Q1 2025 was $321.04 million, resulting in a gross margin of 74%, compared to 69% in Q1 2024[88]. - Net loss for Q1 2025 was $77.91 million, compared to a net loss of $291.48 million in Q1 2024[88]. - Adjusted EBITDA for the same period was $83,943 thousand, an increase from $78,515 thousand in the prior year, while GAAP net loss improved to $(77,907) thousand from $(291,478) thousand[119]. - Adjusted EPS for Q1 2025 was $0.24, compared to $0.28 in Q1 2024, with a GAAP diluted net loss per share of $(0.19) versus $(0.75) in the prior year[120]. Expenses and Cost Management - Operating expenses totaled $448.98 million in Q1 2025, significantly reduced from $690.92 million in Q1 2024, primarily due to workforce reductions[88]. - Research and development expenses decreased to $220.63 million in Q1 2025 from $282.73 million in Q1 2024, reflecting headcount reductions[88]. - The company incurred approximately $14 million in employee separation costs and $6 million in non-employee charges related to workforce reductions in Q1 2025[81]. Cash Flow and Financial Position - Free cash flow for the three months ended March 31, 2025, was $7,308 thousand, a significant improvement from $(14,563) thousand in the same period last year[122]. - As of March 31, 2025, the company had cash and cash equivalents totaling $1.5 billion, primarily held for working capital purposes[123]. - Net cash provided by operating activities was $13,026 thousand for Q1 2025, compared to $(7,373) thousand in Q1 2024[129]. - The accumulated deficit as of March 31, 2025, was $3.8 billion, with expectations of continued operating losses on a GAAP basis for the foreseeable future[126]. - The company plans to meet future capital requirements through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions[128]. - The company issued $690 million in aggregate principal amount of the 2030 Notes in Q1 2025, using the proceeds to repurchase outstanding 2026 Notes[125]. - The company may seek additional strategic partnerships and acquisitions to enhance its offerings, which could increase cash requirements[128].

Company Performance - Unity Software Inc. reported a quarterly loss of $0.19 per share, which was better than the Zacks Consensus Estimate of a loss of $0.38, representing an earnings surprise of 50% [1] - The company posted revenues of $435 million for the quarter ended March 2025, surpassing the Zacks Consensus Estimate by 5.60%, although this is a decrease from year-ago revenues of $460.38 million [2] - Over the last four quarters, Unity has consistently surpassed consensus EPS estimates and revenue estimates [2] Stock Outlook - Unity Software shares have declined approximately 5.1% since the beginning of the year, compared to a decline of 4.7% for the S&P 500 [3] - The company's earnings outlook is crucial for investors, as it includes current consensus earnings expectations for upcoming quarters [4] - The current consensus EPS estimate for the next quarter is -$0.29 on revenues of $426.57 million, and for the current fiscal year, it is -$1.10 on revenues of $1.77 billion [7] Industry Context - The Internet - Software industry, to which Unity belongs, is currently ranked in the top 37% of over 250 Zacks industries, indicating a favorable outlook [8] - Empirical research suggests a strong correlation between near-term stock movements and trends in earnings estimate revisions, which can impact Unity's stock performance [5][6]

Financial Data and Key Metrics Changes - The company exceeded the high end of its revenue guidance by $20 million, with adjusted EBITDA coming in $19 million above guidance [14][15] - Adjusted EBITDA for the quarter was $84 million, with 19% margins, reflecting a 200 basis point year-over-year expansion [15][16] - Free cash flow improved by $22 million year-over-year to $7 million, despite the first quarter traditionally being modest for cash flow [16][17] Business Line Data and Key Metrics Changes - In the Grow segment, revenue was $285 million, down 4% year-over-year, partially driven by the rollout of Unity Vector [14][15] - The Create segment reported revenue of $150 million, down 8% year-over-year, due to a transition away from low-margin professional services [15] - Subscription revenues in the Create segment grew double digits year-over-year, with nearly 80% of Create revenue now coming from high-margin subscriptions [15][10] Market Data and Key Metrics Changes - The Unity ad network migration to the new AI platform, Unity Vector, was completed ahead of schedule, leading to a 15-20% lift in installs and in-app purchase values on iOS [6][7] - The company is optimistic about the future potential of AR and VR gaming, with predictions of 216 million players worldwide by 2025 [11] Company Strategy and Development Direction - The company is focused on building a culture of execution and discipline, reestablishing trust with customers, and accelerating product innovation to drive growth [6][10] - Unity aims to modernize its advertising business and create sustainable revenue growth over the long term, with a commitment to investing in high-performing products [8][9] - The company is also expanding its platform beyond gaming into other industries, which has become the fastest-growing part of its subscription business [12][13] Management's Comments on Operating Environment and Future Outlook - Management has not seen any noticeable impact from macroeconomic factors on business performance thus far, noting that gaming is historically insulated from economic downturns [40][41] - The company remains optimistic about the performance of Unity Vector and expects it to drive revenue growth in the Grow segment, despite some declines in legacy ad products [18][19] Other Important Information - The company has a cash balance of $1.5 billion and debt of $2.2 billion, with a recent convertible offering well-received by the market [17][18] - The company is focused on minimizing shareholder dilution and stock compensation expenses, which decreased by nearly $45 million year-over-year [16][17] Q&A Session Summary Question: Can you provide more detail on the Vector rollout and customer response? - Management noted that the performance of Vector is exceeding expectations, leading to increased spending from advertisers as they see better returns [25][28] Question: Is subscription revenue growth driven by price increases or new customer growth? - The growth is attributed to both core business growth and the impact of previous price increases, with significant adoption of Unity 6 contributing to this [30][31] Question: What is the trajectory of improvements expected for Vector in the back half of the year? - Management indicated that improvements will be iterative, with measurable increases already seen, and they are optimistic about future performance [34][36] Question: Have macroeconomic factors impacted the business? - Management has not observed any significant impact from macroeconomic conditions, as gaming tends to be resilient during downturns [40][41] Question: What is the current performance of Vector compared to previous ad networks? - The performance is better than expected, with significant improvements in return on ad spend (ROAS) already being observed [116][119]

Financial Data and Key Metrics Changes - Unity exceeded the high end of its revenue guidance by $20 million, with adjusted EBITDA coming in $19 million above guidance [13][18] - Adjusted EBITDA for the quarter was $84 million with 19% margins, representing a 200 basis points year-over-year expansion [14][15] - Free cash flow improved by $22 million year-over-year to $7 million [15] - Cash at the end of the quarter was $1.5 billion, and debt was $2.2 billion [16] Business Line Data and Key Metrics Changes - In the Grow segment, revenue was $285 million, down 4% year-over-year, partially driven by the rollout of Unity Vector [13][14] - In the Create segment, revenue was $150 million, down 8% year-over-year, due to the transition away from low-margin professional services [13][14] - Subscription revenues in the Create segment grew double digits year-over-year, with nearly 80% of Create revenue now coming from high-margin subscriptions [14][9] Market Data and Key Metrics Changes - Unity Vector is expected to provide a 15-20% lift in installs and in-app purchase value compared to the old model, particularly noted in iOS [5][6] - The Unity platform is seeing strong demand across various industries, with nine consecutive quarters of sequential revenue growth [11] Company Strategy and Development Direction - Unity is focused on creating sustainable revenue growth by modernizing its advertising business and leveraging data from the Unity ecosystem [4][6] - The company aims to capitalize on the growing AR and VR gaming market, with predictions of reaching 216 million players worldwide by 2025 [10] - Unity is committed to enhancing its product offerings and maintaining a competitive edge in the gaming and non-gaming sectors [12] Management's Comments on Operating Environment and Future Outlook - Management has not observed any significant impact from macroeconomic factors on business performance thus far [40] - The company remains optimistic about the future of its Grow business, with expectations of revenue growth driven by improved performance from Unity Vector [18][19] - Management is closely monitoring the economic environment while maintaining a focus on driving returns for shareholders [41] Other Important Information - Unity has completed the migration of its ad network to the new AI platform, Unity Vector, ahead of schedule [4][5] - The company is seeing strong adoption of Unity 6, with over 4.4 million downloads and 43% of active users having upgraded [8][9] Q&A Session Summary Question: Can you provide more details on the Vector rollout and customer response? - Management noted that the performance of Vector is exceeding expectations, leading to increased spending from advertisers as they see better returns [26][28] Question: What is driving the strong growth in subscription revenue? - The growth is attributed to both new customer acquisitions and the impact of previous price increases, with expectations for continued double-digit growth [30][100] Question: How is the transition from legacy models to Vector progressing? - The transition is complete, and the company expects to see cost reductions as it no longer runs the two models in parallel [66][67] Question: What is the expected impact of nonstrategic revenue on future guidance? - Nonstrategic revenue is expected to decline, with approximately $17 million recorded in Q1 and a forecast of $30 million for the full year [92][93] Question: How does Unity plan to leverage data insights across its platform? - The company aims to provide valuable insights into consumer behavior to enhance both advertising and game development, with a focus on optimizing user acquisition [75][76]

Revenue Performance - Revenue for Q1 2025 was $435 million, a decrease of 6% year-over-year from $460 million in Q1 2024[4] - Create Solutions revenue was $150 million, down 8% year-over-year, while Grow Solutions revenue was $285 million, down 4% year-over-year[4][5] - Revenue for Q1 2025 was $435 million, a decrease of 5.5% compared to $460.38 million in Q1 2024[29] Net Loss and Earnings - Net loss for the quarter was $78 million, significantly improved from a net loss of $291 million in Q1 2024, resulting in a net loss margin of (18)% compared to (63)%[7][8] - Basic and diluted net loss per share was $0.19, compared to $0.75 for the same period in 2024[6][8] - GAAP net loss for Q1 2025 was $77.91 million, significantly improved from a net loss of $291.48 million in Q1 2024[29] EBITDA and Profit Margins - Adjusted EBITDA for Q1 2025 was $84 million, with a margin of 19%, up from $79 million and a margin of 17% in Q1 2024[10] - Adjusted EBITDA for Q1 2025 was $83.94 million, representing an increase of 6.1% from $78.52 million in Q1 2024[29] - GAAP gross profit for Q1 2025 was $321.04 million, compared to $315.99 million in Q1 2024, resulting in a GAAP gross margin of 74%[29] - Adjusted gross profit for Q1 2025 was $359.10 million, slightly down from $376.58 million in Q1 2024, maintaining an adjusted gross margin of 82%[29] Cash Flow and Operating Activities - Net cash provided by operating activities was $13 million, a turnaround from net cash used of $7 million in Q1 2024[9][10] - Free cash flow for the quarter was $7 million, compared to negative $15 million in Q1 2024[10] - Free cash flow for Q1 2025 was $7.31 million, a recovery from a negative free cash flow of $14.56 million in Q1 2024[33] - As of March 31, 2025, cash and cash equivalents totaled $1,552 million, an increase of $24 million from $1,528 million at the end of 2024[12] Guidance and Future Outlook - Q2 2025 revenue guidance is projected to be between $415 million and $425 million, with adjusted EBITDA expected to be between $70 million and $75 million[15] - Unity expects to enhance its platform and accelerate product innovation, with a focus on opportunities in the AR and VR gaming market[34] Expenses - Research and development expenses for Q1 2025 were $220.63 million, down from $282.73 million in Q1 2024, representing 51% of revenue[31] - Sales and marketing expenses for Q1 2025 were $162.01 million, reduced from $230.63 million in Q1 2024, accounting for 37% of revenue[31] Market Positioning - The early success of Unity Vector and strong demand for Unity 6 highlight the company's strategic positioning in the game development market[2]

Core Insights - The article emphasizes the importance of earnings acceleration in driving stock prices higher, indicating that stocks often experience an increase in earnings before their prices rise [1][3]. Earnings Acceleration Definition - Earnings acceleration refers to the incremental growth in a company's earnings per share (EPS), specifically when the quarter-over-quarter earnings growth rate increases over time [2]. Importance of Earnings Acceleration - Unlike earnings growth, which may already be reflected in stock prices, earnings acceleration can identify stocks that have not yet attracted investor attention, leading to potential price rallies [3]. Earnings Growth Trends - An increasing percentage of earnings growth suggests a fundamentally sound company, while a stable or decreasing percentage may indicate consolidation or a slowdown, potentially dragging prices down [4]. Screening Parameters - The article outlines specific screening parameters to identify stocks with earnings acceleration, including: - Last two quarter-over-quarter EPS growth rates exceeding previous periods [5]. - Projected EPS growth rates for the upcoming quarter expected to exceed prior periods [6][7]. Top Stocks Identified - The screening process narrowed down to four stocks, with three highlighted: - **Lam Research Corporation (LRCX)**: Expected earnings growth rate of 32.8% for the current year, Zacks Rank 2 (Buy) [8]. - **Unity Software Inc. (U)**: Anticipated earnings growth rate of 34.5% for the current year, Zacks Rank 1 (Strong Buy) [10]. - **Gulfport Energy Corporation (GPOR)**: Expected earnings growth rate of 85.3% for the current year, Zacks Rank 1 (Strong Buy) [11].

Group 1 - Unity Software Inc. has reached a key level of support and recently broke out above the 50-day moving average, indicating a short-term bullish trend [1] - The stock has moved 26.7% higher over the last four weeks and is currently rated as a Zacks Rank 1 (Strong Buy) [2] - Positive earnings estimate revisions have occurred, with one higher estimate compared to none lower for the current fiscal year, and the consensus estimate has also increased [2][3] Group 2 - The combination of positive technical factors and earnings estimate revisions suggests that investors may want to monitor Unity Software Inc. for potential gains in the near future [3]

Market Overview - The S&P 500 index is down approximately 9.5% from its high, while the Nasdaq Composite index has fallen 13.5% [1] - The stock market has experienced significant volatility, which may present investment opportunities in companies with strong long-term potential [2] Unity Software - Unity Software provides tools for developers to create video games and digital content, along with digital advertising tools [3] - Despite being a leader in the game-engine services space, Unity's stock has underperformed, down about 89% from its all-time high shortly after its IPO in 2020 [4][5] - In Q4, Unity's sales declined 25% year over year to approximately $457 million, with a net loss of $127 million [6] - However, revenue from Unity's core strategic portfolio increased 4% year over year to $442 million, indicating potential for recovery [7] - The company is undergoing restructuring and strategic shifts, including changes to its digital advertising network and the rollout of a new AI platform [7] - Unity's shares are considered a worthwhile buy ahead of its first-quarter earnings release on May 7 [8] Kenvue - Kenvue, a spinoff from Johnson & Johnson, has not performed as expected, down more than 15% from its all-time high [9] - The company reported 1.9% organic sales growth in its self-care segment and 4.1% growth in essential health, but a decline of 1.9% in the skin health and beauty segment [11] - Kenvue increased its marketing budget to 10.6% of sales in 2024, but recovery is slower than anticipated [12] - There are signs of improvement in the skin health and beauty segment, with organic sales rising 2.6% in Q4 2024 [13] - Kenvue trades at just below 21 times estimated free cash flow for 2025, close to fair value for a mature consumer staple [14] - The stock offers a 3.6% dividend yield, making it attractive for value investors despite low growth prospects [14]