Unity Software Prepares for Q3 Earnings Amidst Significant Challenges

Unity Software (U) is set to announce its third-quarter 2024 results on November 7.

The company forecasts its third-quarter revenues to be between $415 million and $420 million, reflecting a 4-6% decline year over year. In contrast, the Zacks Consensus Estimate stands at $428.01 million, representing a sharp decrease of 21.35% from the same quarter last year.

Analysts project an earnings loss of 39 cents per share, with no changes made in the last month.

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Discover the latest EPS estimates and surprises on Zacks Earnings Calendar.

Earnings History Insights

In the most recent quarter, Unity Software experienced an earnings surprise of 27.27%. In fact, the company’s earnings have beaten the Zacks Consensus Estimate in each of the last four quarters, with an average surprise of 67.08%.

Unity Software Inc. Price and EPS Surprise

Unity Software Inc. price-eps-surprise | Unity Software Inc. Quote

Earnings Predictions

The current Earnings ESP for Unity Software is at 0.00%, and the company holds a Zacks Rank of #4 (Sell). This lack of a positive Earnings ESP alongside a lower rank suggests the potential for an earnings miss. Utilizing the Earnings ESP Filter can help identify stocks positioned for earnings surprises.

Factors Impacting Upcoming Results

Unity Software, known for its popular game development engine, is facing hurdles in its core business areas. The company is currently focusing its efforts on its main business segments through a restructuring initiative aimed at long-term growth.

Nevertheless, declining performance in certain areas may negatively impact revenue growth for the upcoming quarter. For instance, during the second quarter, revenue from non-strategic divisions plummeted 71% year over year, totaling $23 million, which was a result of the intentional portfolio reset. This trend is expected to continue, with revenues from non-strategic businesses projected to be in the single digits by year-end.

In the second quarter, revenue from the Create Solutions segment fell 2% sequentially to $129 million, attributed to drops in Strategic Partnerships and Professional Services. This downward trend is likely to persist into the third quarter.

Unity Software is also adjusting its cost structure, including a previously announced employee reduction of about 25%, to strengthen its financial position.

The competition is fierce in the game development and advertising technology markets. Unity’s main competitor, Epic Games’ Unreal Engine, excels in high-end console and PC game development, alongside Amazon’s Lumberyard (now Open 3D Engine). Additional competitors include the increasingly popular open-source Godot, and CryEngine, known for its impressive graphics.

In the mobile advertising technology space, Unity contends with rivals like AppLovin (APP) and Alphabet (GOOGL)-owned Google AdMob. As Unity ventures into non-gaming sectors, it will also compete against specialized software providers in industries like architecture, automotive, and film production.

Despite these challenges, Unity Software remains a leader in the mobile gaming market, supporting 70% of the top mobile games worldwide.

The Industries segment, focusing on non-gaming applications for Unity’s technology, is anticipated to have been a key growth driver in the upcoming quarter. In the prior quarter, this segment showcased remarkable growth at 59% year-over-year, accounting for 18% of total Create Solutions revenues compared to 12% last year. This pivot into new markets could create additional revenue opportunities and lessen Unity’s reliance on the gaming industry.

Recent Stock Performance & Valuation

Unity Software has faced a rough start in 2024, with its stock tumbling 50.3%, in stark contrast to a 23.5% gain in the Zacks Computer and Technology sector. Investors are concerned this decline may signal deeper issues.

Year-to-Date Performance

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The question of whether the current stock valuation accurately reflects Unity’s long-term growth potential is critical. The company is trading at a forward price-to-sales (P/S) ratio of 4.51X, compared to the Zacks Internet – Software industry’s 2.64X, indicating a possibly inflated valuation.

Unity’s P/S Ratio Indicates Valuation Concerns

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Investment Considerations: Weighing Risks and Opportunities

Heading into its third-quarter 2024 earnings, Unity Software faces significant challenges. Ongoing restructuring and portfolio adjustments are likely to impact short-term performance despite the firm’s strong position in mobile gaming. The Create Solutions segment shows worrying signs, with revenue declines and fierce competition from Epic Games’ Unreal Engine and emerging alternatives like Godot. While the Industries segment exhibits solid growth, the 71% drop in revenues from non-strategic portfolios, coupled with workforce cuts and the uncertain turnaround strategy, casts doubt on Unity Software’s valuation and potential growth. Competing in a tough market while attempting to diversify its offerings will remain a key concern.

Conclusion

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Investors Advise Caution Amid Ongoing Challenges at Major Software Company

Reassessing Strategies: Non-Strategic Revenue Declines and Competitive Pressures

The software company is facing significant restructuring hurdles, along with falling revenues from its non-strategic portfolio. With stiff competition in both gaming and non-gaming industries, investors are encouraged to adopt a cautious approach. It may be wise to wait for clearer indicators of successful strategy execution before committing to new investments. Although the company holds a leading position in mobile gaming and shows promising growth potential in its Industries segment, several near-term challenges loom ahead. These include staff reductions, struggles in the Create Solutions division, and an overall portfolio realignment, all of which contribute to a heightened risk of execution problems leading into the earnings report for the third quarter of 2024.

Shareholders might opt to maintain their current holdings, given the company’s strategic refocus and prominent market stance. However, new investors would be prudent to hold off until they see tangible signs of stabilization in core business areas and improvements in financial performance.

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The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.