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Unity Software (U), a so-called metaverse play, is taking a huge hit today after the company issued in-line Q1 results and provided revenue guidance for Q2 and FY22 that badly missed the mark. The provider of a platform for creating and operating real-time 3D content (RT3D) is ironically struggling due to a lack of unity between its two core segments.

On the positive side, Unity's Create segment, which is used by content creators (developers, designers, engineers, artists) to produce high definition 2D and 3D content, continues to generate strong growth, with revenue up 65% to $116.4 mln.

This strength should lead to robust growth for Unity's Operate segment, since that segment helps users to monetize that content and to grow their user bases, but Operate growth lagged at just 26% for Q1. After a solid start to the year, Operate's business slowed significantly in February and March. What's really hurting the stock, though, is that the issues facing Operate are expected to persist into Q2 and Q3, with the impact forecast to finally relent in Q4.

There may be more behind today's weakness than just the disappointing quantitative guidance. During last night's earnings conference call, CEO John Riccitiello acknowledged that Operate's troubles are self-inflicted; that insight has the potential to shake investors' confidence in management. Riccitiello highlighted two primary problems.

• Unity experienced a couple challenges with monetization. In Riccitiello's words, "The first was a fault in our platform that resulted in reduced accuracy for our Audience Pinpointer tool, a revenue-expensive issue, given that our Pinpointer tool experienced significant growth post the IDFA changes. The second is that we lost the value of a portion of our data – training data, due, in part, to us ingesting bad data from a large customer."
  • Audience Pinpointer uses machine-learning and algorithms based on real-time user data to determine a bid at the time of an ad request. The IDFA changes refer to Apple's (AAPL) iOS privacy changes.
• The result of these missteps is that Unity expects revenue to be negatively impacted by about $110 mln in 2022. Broken down by quarter, 60% of the impact will be felt in Q2, followed by 30% in Q3 and 10% in Q4.
• To remedy the situation, Unity is deploying monitoring, alerting, and recovery systems to mitigate future data issues while also improving the accuracy of its Audience Pinpointer product.

The good news is that Unity views these setbacks as temporary and believes that its end markets are otherwise healthy. Additionally, the company plans to ramp up its cost-cutting efforts, identifying $100 mln more in spending reductions for FY22. Most of these cuts will occur in the back half of 2022, potentially paving the way for Unity to post its first profitable quarter in Q4. However, these positives are not resonating with investors today. In a volatile market that's especially punishing to a growth stock like Unity, there is no margin for error.