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Unity Software (U -8%) turns toward multi-year lows despite exceeding earnings and revenue estimates in Q1 and reaffirming its financial goals for FY24. The software development platform, used widely across the video game industry, kicked off a company-wide reset last year following pricing backlash under former CEO John Riccitiello. While stating that it remains on track to achieve its previously outlined financial aspirations for the year was encouraging, Unity still has a long way to go to recover the lost ground from a sour combination of waning consumer demand and wrong turns by management. Without seeing quicker signs of its reset actions manifesting in the numbers, investors remained turned off, keeping their boot on the stock.

• Alongside Unity's Q1 report was its announcement that former Zynga (TTWO) COO Matt Bromberg would become the permanent CEO next week, replacing interim CEO Jim Whitehurst, who is transitioning to Executive Chair. Mr. Bromberg will likely stay the course, at least for the near term, potentially testing investors' patience as they wait for Unity's turnaround actions to reignite growth.
• Thus far, Unity's focus on what it does best -- Engine, Cloud, and Monetization -- has not moved the needle surrounding revenue. Unity registered an 8.1% drop in revs yr/yr during Q1 to $460 mln. However, this is largely due to Unity's lagging non-core businesses. When focusing purely on its strategic portfolio (comprised of its core businesses), revs ticked 2% higher yr/yr to $426 mln, exceeding its $415-420 mln outlook.
• Divesting its non-core assets and emphasizing profitability has resulted in a decent uptick in adjusted EPS, which expanded to $0.35 in the quarter compared to $0.03 in 1Q23. Profitability remains an important gauge of whether Unity's reset is progressing favorably. In Q1, adjusted EBITDA grew by $50 mln yr/yr, keeping the company on track to achieve its $400-425 target by year's end. Unity also expects to still exit the year with adjusted EBITDA margins of over 25%.
• Hitting its FY24 targets will depend on growth accelerating following a disappointing Q2. Unity anticipates Q2 strategic revenue to slip by 6-7% yr/yr, a sharp U-turn from the minor growth delivered in Q1. After clearing this speed bump, Unity is energetic about 2H24, reaffirming its projection of accelerating growth, culminating in a +2-4% jump in strategic revs yr/yr.

With shares stuck around multi-year lows, the question following Unity's Q1 report is whether the company is doing enough to plug the holes of a sinking ship. We mentioned last quarter that Unity's reset plan could be its ticket out of a lengthy downward trend. However, upbeat commentary surrounding its turnaround plan will not cut it, especially given how long the stock has traded sideways. Progress must show up in Unity's numbers. We believe investors are deploying a wait-and-see attitude at the moment, remaining on the sidelines until the second half of the year, when Unity has repeatedly mentioned will be the beginning of a long-awaited recovery.