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Video game engine company Unity (NYSE: U) reported fourth-quarter results that should make investors squirm. Total revenue plunged 25% year over year, while revenue in the Create Solutions segment tumbled 47%. Even excluding the impact of the termination of a deal with Wētā FX, Create Solutions revenue would have still been down 20%. Grow Solutions, which covers Unity's advertising business, suffered a smaller 5% revenue decline.
Much of Unity's sales decline was driven by the company's portfolio reset, which saw Unity exit businesses and simplify its operations. A big decline was expected, and the company actually beat analyst expectations. However, Unity's guidance for the first quarter was unequivocally disappointing. The company guided for a steep sequential revenue decline that fell far short of analyst estimates.
While Unity's guidance was awful, the stock surged on Thursday. There's no telling whether this rally will hold, but there were some signs within Unity's results that point to the start of a turnaround.
Green shoots are popping up
Unity officially scrapped its Runtime Fee late last year, which was set to charge developers based on the number of game installs. Instead, the company boosted subscription pricing for its larger customers. Even with the higher pricing, Unity has picked up the pace of closing new deals and renewals. Subscription revenue was up 15% year over year in the fourth quarter, aided by the launch of Unity 6.
Beyond gaming, Unity is targeting various industries that need top-notch 3D visualization software. Unity reported a 50% increase in revenue within its industry segment, with notable new customers including Toyota and RTX. Unity doesn't disclose industry-related revenue, so the total is likely still small. But selling to non-gaming companies is a major long-term growth opportunity.
In the advertising business, Unity is working feverishly to rebuild its tech stack and improve the platform for its customers. Unity will begin migrating its ad network to Unity Vector, its new artificial intelligence (AI) platform, toward the end of the first quarter. Vector uses self-learning AI models and data from across Unity's business to better optimize ad performance and produce better outcomes for advertisers.
Turning around the advertising business will take time. Unity CEO Matthew Bromberg was quick to say that the benefits of the Vector platform won't flow through to the company's results immediately. Unity is being cautious with its first-quarter outlook to reflect the fact that rebuilding the advertising business will likely be a long process.