Unity's Turnaround Is Slowly Taking Shape

Core Insights - Unity's fourth-quarter revenue fell 25% year over year, with Create Solutions segment revenue down 47% and Grow Solutions revenue declining 5% [1][2] - The company's portfolio reset, which involved exiting certain businesses, contributed significantly to the sales decline, although it exceeded analyst expectations [2] - Despite disappointing guidance for the first quarter, Unity's stock surged, indicating potential signs of a turnaround [3] Revenue Performance - Create Solutions revenue would have still declined 20% even without the termination of a deal with Wētā FX [1] - Subscription revenue increased by 15% year over year in the fourth quarter, supported by the launch of Unity 6 [4] - Unity reported a 50% increase in revenue within its industry segment, targeting non-gaming sectors like automotive [5] Advertising Business - Unity is migrating its ad network to Unity Vector, a new AI platform aimed at optimizing ad performance [6] - The rebuilding of the advertising business is expected to take time, with CEO Matthew Bromberg indicating that immediate benefits from the Vector platform are unlikely [7] Financial Health - Unity is generating positive free cash flow despite significant revenue declines and negative net income, with over $1.5 billion in cash at the end of 2024 [8] - The gap between earnings and cash flow is primarily due to stock-based compensation and amortization of intangible assets [8] Long-term Outlook - Unity's cancellation of the Runtime Fee and efforts to rebuild trust with developers are seen as positive steps for long-term growth [9] - The current market capitalization of around $11 billion may appear unjustified, but the company's dominant position in the video game engine market and potential in advertising could make it an attractive turnaround stock [10]