We came across a bearish thesis on Unity Software Inc. on Darius Dark Investing’s Substack. In this article, we will summarize the bears’ thesis on U. Unity Software Inc.'s share was trading at $29.10 as of January 30th. U’s forward P/E was 81.97 according to Yahoo Finance. Games, gaming, gamer Photo by Alex Haney on Unsplash Unity Software Inc. operates a platform to create and grow games and interactive experiences for mobile phones, PCs, consoles, and extended reality devices in the United States and ...

Core Insights - Unity Software Inc. reported stronger-than-expected third-quarter results, highlighting momentum in its Vector platform, which contributed to double-digit sequential growth and enhanced the company's advertising and monetization business [1][2] - Analyst Bernie McTernan maintained a Buy rating on Unity Software and increased the price forecast from $40 to $50, reflecting confidence in the company's growth trajectory [1][2] Financial Performance - Vector revenue grew 11% quarter over quarter, exceeding management's mid-single-digit guidance, reinforcing positive sentiment around Unity's performance [2] - Following the strong third-quarter results, the analyst raised the 2025 revenue forecast by 2% and adjusted EBITDA by 8%, attributing this to the unexpected growth at Vector [5] Future Projections - Unity is expected to maintain similar growth in the fourth quarter, with a focus on potential upside and the growth trajectory leading into 2026 [3] - The analyst projects a 20% year-over-year growth for the Grow segment in 2026, driven by improvements in Vector's machine learning and new data integrations [3][5] - McTernan anticipates fourth-quarter revenue of $485 million and an EPS loss of $(0.12) [6] Developer Adoption - 90% of new projects on Unity 6.2 are utilizing the updated data framework with runtime integration, indicating strong developer adoption of the platform [4]

Core Insights - Unity Software is experiencing significant valuation gains following its recent third-quarter report, with stock prices increasing by 14.1% and reaching a peak of 17.7% shortly after market opening [1] - Over the past year, Unity's stock has appreciated approximately 101%, raising questions about whether investors should pursue this rally amid a strong bullish trend in AI stocks [2] Financial Performance - Unity's revenue from its grow segment reached $318 million, reflecting an 11% increase on a sequential quarterly basis and a 6% year-over-year growth, driven by its digital-marketing unit and AI-powered Vector platform [4] - The create segment generated $152 million, marking a 3% year-over-year increase [4] - The company's non-GAAP earnings per share were reported at $0.17 on sales of $471 million, surpassing Wall Street's expectations of $0.17 per share on sales of $453.06 million, with overall revenue up 5% compared to the same quarter last year [5] Future Guidance - For the fourth quarter, Unity projects revenue between $480 million and $490 million, indicating an expected annual sales growth of approximately 6% over last year's $457 million [6] - The growth of Unity's ad network, particularly through its Vector platform, is anticipated to continue driving significant improvements in overall business performance [6] Valuation Considerations - Unity's stock is currently valued at about 9.6 times this year's expected sales, which may appear richly valued given the relatively modest sales growth [7] - However, there is potential for significant acceleration in sales growth over the next year and beyond, suggesting a strong long-term setup for the company [7] Market Reaction - Following the release of its third-quarter earnings, Unity's stock has seen double-digit gains, with sales and profits exceeding Wall Street's expectations [8] - The new AI-powered advertising platform is playing a crucial role in the company's turnaround strategy [8]

Group 1 - Proactive provides fast, accessible, informative, and actionable business and finance news content to a global investment audience [2] - The news team covers medium and small-cap markets, as well as blue-chip companies, commodities, and broader investment stories [3] - Proactive's content includes insights across various sectors such as biotech, pharma, mining, natural resources, battery metals, oil and gas, crypto, and emerging technologies [3] Group 2 - Proactive is committed to adopting technology to enhance workflows and improve content production [4] - The company utilizes automation and software tools, including generative AI, while ensuring all content is edited and authored by humans [5]

Financial Data and Key Metrics Changes - Adjusted revenue for Q1 2025 was $751 million, down 8.5% year-over-year from $821 million in Q1 2024, primarily driven by the government segment [15][18] - Adjusted EBITDA for the quarter was $37 million, compared to $36 million in Q1 2024, with an adjusted EBITDA margin of 4.9%, up 50 basis points year-over-year [15][16] - New business annual contract value (ACV) increased by 14% year-over-year to $109 million, with total contract value (TCV) up 96% to $280 million [13][14] Business Line Data and Key Metrics Changes - Commercial segment adjusted revenue was $402 million, down 4.1% year-over-year, with adjusted EBITDA down 11% and EBITDA margin at 10%, down 70 basis points [16][17] - Government segment adjusted revenue decreased by 16% to $216 million, with adjusted EBITDA down 31% to $38 million and an EBITDA margin of 17.6% [17][18] - Transportation segment adjusted revenue was $133 million, down 7.6% year-over-year, but adjusted EBITDA improved to $6 million from $1 million in Q1 2024, with an EBITDA margin of 4.5% [19] Market Data and Key Metrics Changes - Qualified ACV pipeline increased by 16% year-over-year to $3.2 billion, with both government and commercial segments showing significant growth [14] - The company reported a strong sales pipeline and improved retention in the government business, indicating potential for future growth [29] Company Strategy and Development Direction - The company is focused on portfolio rationalization to enhance growth and reduce costs, having completed three divestitures in 2024 generating nearly $800 million in net proceeds [11][12] - The strategy includes targeting additional assets for divestiture expected to generate another $350 million in proceeds, surpassing the $1 billion target [11][12] - Investments in AI and fraud prevention capabilities are being emphasized, particularly in government services, to drive efficiency and reduce fraud [35][36] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about achieving revenue guidance despite macroeconomic uncertainties, citing minimal exposure to tariffs and a strong pipeline of government contracts [8][24] - The company expects Q2 2025 revenue to be sequentially higher than Q1 but slightly below Q2 2024, with adjusted EBITDA margin projected between 4% and 4.5% [26][27] - Management highlighted opportunities in government efficiency and fraud reduction as key growth areas, particularly in Medicaid and SNAP programs [30][34] Other Important Information - The company ended the quarter with approximately $293 million in cash and a largely undrawn $550 million revolving credit facility [21] - Adjusted free cash flow for the quarter was negative $74 million, an improvement compared to Q1 2024 [21] - The company incurred $3 million in expenses related to a cyber event, with $22 million accrued for potential notification requirements [20] Q&A Session Summary Question: How does the push for government efficiency create opportunities for the company? - Management explained that while federal funds for entitlements are distributed through states, the administrative costs present opportunities for the company to help states improve efficiency and reduce fraud [40][41][43] Question: Can you elaborate on the cyber event and its impact? - Management confirmed that all costs related to the cyber event are accounted for, with no significant operational impact, and ongoing examination of data is in progress [46][47] Question: Have there been any regulatory hurdles in deploying AI solutions? - Management stated that there have been no regulatory hurdles encountered in deploying AI, particularly in sensitive government applications [52][53] Question: What criteria are used for identifying assets for divestiture? - Management indicated that the focus is on identifying assets with scarcity value and maximizing returns from divestitures while balancing debt reduction and reinvestment [58][59] Question: What feedback is being received from state and local contacts regarding opportunities? - Management noted a mixed response from states, with some actively seeking to reduce fraud and improve efficiency, while others are more cautious [71][72]

Financial Data and Key Metrics Changes - Adjusted revenue for Q1 2025 was $751 million, down 8.5% year over year from $821 million in Q1 2024, primarily driven by the government segment [15][19] - Adjusted EBITDA for the quarter was $37 million, slightly up from $36 million in Q1 2024, with an adjusted EBITDA margin of 4.9%, an increase of 50 basis points year over year [15][19] - New business annual contract value (ACV) increased by 14% year over year to $109 million, with total contract value (TCV) up 96% to $280 million [13][14] Business Line Data and Key Metrics Changes - Commercial segment adjusted revenue was $402 million, down 4.1% year over year, with adjusted EBITDA down 11% and EBITDA margin at 10%, down 70 basis points [16][18] - Government segment adjusted revenue decreased by 16% to $216 million, with adjusted EBITDA down 31% to $38 million and an EBITDA margin of 17.6% [18][19] - Transportation segment adjusted revenue was $133 million, down 7.6% year over year, but adjusted EBITDA improved to $6 million from $1 million in Q1 2024, with an EBITDA margin of 4.5% [20] Market Data and Key Metrics Changes - Qualified ACV pipeline increased by 16% year over year to $3.2 billion, with both government and commercial segments showing significant growth [14] - The company reported a strong sales pipeline and improved retention in the government business, indicating a positive outlook for future growth [30] Company Strategy and Development Direction - The company is focused on portfolio rationalization, having completed three divestitures in 2024 that generated nearly $800 million in net proceeds, with plans for further asset sales in 2025 [11][12] - The strategy includes leveraging government opportunities, enhancing AI capabilities, and improving operational efficiencies to drive growth [30][38] - The company aims to reduce debt and increase profitability through capital deployment from divestitures, targeting an optimized portfolio with two operating units [11][12] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about achieving guidance numbers for 2025 despite macroeconomic uncertainties, citing minimal exposure to tariffs and a strong government business pipeline [7][24] - The company expects Q2 2025 revenue to be sequentially higher than Q1 but slightly below Q2 2024, with adjusted EBITDA margin projected between 4% and 4.5% [26] - Management highlighted opportunities in fraud reduction and government efficiency initiatives as key growth drivers [36][38] Other Important Information - The company ended the quarter with approximately $293 million in cash and a largely undrawn $550 million revolving credit facility [22] - Adjusted free cash flow for the quarter was negative $74 million, an improvement compared to Q1 2024 [22] - The company incurred $3 million in expenses related to a cyber event, with no material operational impact reported [21][49] Q&A Session Summary Question: Can you elaborate on how government efficiency efforts create opportunities for the company? - Management explained that while federal funds for entitlements are distributed through states, the administrative costs present opportunities for the company to help states improve efficiency and reduce fraud [41][45] Question: What was the impact of the cyber event? - Management confirmed that all costs related to the cyber event are accounted for, with no significant operational impact, and ongoing examination of data is in progress [48][49] Question: Have there been any regulatory hurdles in deploying AI solutions? - Management stated that there have been no regulatory hurdles encountered in deploying AI, particularly in sensitive government or healthcare applications [54][55] Question: What criteria are used for identifying assets for divestiture? - Management indicated that the focus is on identifying assets with scarcity value and maximizing returns from divestitures while balancing debt reduction and reinvestment [60][62] Question: What feedback is being received from state and local contacts regarding opportunities? - Management noted a mixed response from states, with some actively seeking efficiency improvements while others are more cautious, but overall, there is a strong interest in fraud reduction initiatives [73][75]