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Unity Software (U) bounces off 52-week lows hit after falling short of analysts' revenue targets in Q3. The software development provider's revenue did meet internal expectations, exceeding the low end of its prior forecast by roughly $4.0 mln. However, Unity conceded that it could do better. Unity also filed for $1.0 bln convertible senior notes due 2027.

Perhaps most striking was recently appointed CEO James Whitehurst, who succeeded former CEO John Riccitiello upon his retirement last month, withdrawing the company's previous guidance for FY23 as he looks to potentially shake up its product portfolio. Mr. Whitehurst commented that several weeks ago, Unity began assessing its portfolio. Without providing too many specifics, there is uncertainty surrounding what Mr. Whitehurst plans to sell off, keep, or improve. CFO Luis Felipe Visoso added that changes will occur during Q4, with full implementation of the company's actions to be finished by the end of 1Q24. At the same time, Unity announced it will reduce its workforce and office locations over the next few months.

• Unity's biggest blemish in the quarter was revenue. The company grew its top line 68.5% yr/yr to $544.21 mln, missing consensus and representing a deceleration from the +79.6% growth posted last quarter.
• Create Solutions, Unity's segment catering to software developers, weighed on revenue in Q3, delivering flat growth yr/yr at $189 mln. China was an underlying factor as Unity continues to deal with a stricter crackdown on gaming in the country. Meanwhile, Unity Game Services, a division within Create Solutions, faced a challenging yr/yr comp when the business delivered record revenue from several new game launches.
• The good news is that Unity's monetization segment, Grow Solutions, expanded sales by 166% yr/yr and 12% pro forma to $355 mln. However, tempering enthusiasm was management's remarks that this business endured some revenue softness toward the end of the quarter and carrying into October due to the previously announced, but mostly in the past, runtime fee introduction.
• Also worth noting was Unity reducing its GAAP net loss in half compared to the year-ago period, resulting in a net loss margin of (23)%, compared to (77)% in 3Q22. Furthermore, adjusted EBITDA of $131 mln, above Unity's $90-100 mln forecast, was also a highlight.

With shares tracking over 10% lower on the year and roughly 85% below all-time highs hit in late 2021, Unity has constantly faced disruptions since the Federal Reserve began its rate-raising campaign. Fading demand for video games and advertising remains a formidable challenge. While video game publishers like Take-Two (TTWO) and Electronic Arts (EA) have already seen signs of demand stabilization, Unity struggles to capitalize on these encouraging trends.

Nevertheless, we think a CEO shakeup was necessary to pull Unity out of its funk; the previous CEO's recent decisions led to investor backlash. Becoming a leaner organization could be what Unity needs to return to profitability, and shares could begin a broader turnaround once more information surrounding the current portfolio review is presented.