Top News

#1: Unity’s Q3 Revenues Rise But Losses Deepen

Unity just released its earnings report for the third quarter Compared to the same quarter last year, revenue was up 13% ($322.9M), which is slow growth compared to previous years but still in line with leadership’s previous forecasts. Further business growth was held back by another decrease in the Operate side of the business, where Unity Ads and Unity Game Services are. Create, the engine side of the business, generated 54% of growth (partially driven by M&A). Gross margins are also lower — Q3 presented a non-GAAP gross margin of 74% (compared to 81% for 2021), which was blamed on higher costs from Weta engineering and a shifting revenue mix as Operate (ads-related sales) decreased.

Additionally, GAAP losses widened to $239.6M, with a significant portion stemming from Unity's aggressive stock-based compensation. Although Unity seemed keen on maintaining a high level of stock-based comp over 2022, it likely needs to rethink its compensation strategy. Shares vested by employees represented 48%(!!) of Q3's revenue, which is heavily diluting shareholders. Dilution is, of course, further aggravated by the now finalized merger with ironSource.

In short, the results of slowed growth, heightened losses, and heavy dilution were underwhelming — and explains why Unity’s stock is down 85% from its all-time highs. This follows a trend that the company has experienced since Q1, as you can see in the chart below.

The decrease in Operate revenue is driven by ads, which still represent the most considerable portion of Unity’s business and the one with the highest margins. While the ads operation has been partly affected by the market slowdown, the impact mainly comes from problems with data training and accuracy for Unity Ads products.

All that negativity aside, Unity’s stock is up roughly 50% since earnings were announced. How could that be? Well, leadership is now expecting accelerating growth and better profitability going forward.

The problems with data trainings accuracy for Audience Pinpointer (which dragged down Operate Solutions growth) are now most in the rearview mirror. Also, revenue for the fourth quarter is now expected to be 35% to 40%, higher than the 21% estimates from the last earnings presentation and more similar to previous years. Lastly, management expects to achieve non-GAAP breakeven by the end of the year — clearly a byproduct of the ironSource merger.

This is a positive development for Unity, and leadership has already made some (initial) changes to work toward profitability. The company announced a slight increase in Unity Editors' price in October, conducted layoffs in the summer, and the merger with ironSource (which is more profitable) naturally moves margins up. However, to achieve the desired results, there is more work for Unity to do.

In the long-term, the ironSource merge contributes to Unity's vision of building an end-to-end platform covering anything gaming-related. ironSource brings a diverse range of Ads products that Unity lacks or is struggling to develop. Most importantly, Unity can now use ironSource mediation (Level Play) as its mediation product.

There are many similarities between Unity and ironSource products and operations, so we can expect Unity to merge some teams (sales, product, account management, and support) and possibly lay off redundant staff. However, in order to add value to customers from both sides, Unity must fully integrate ironSource’s products into the Unity Dashboard. Given that Unity still has to successfully port other acquired products (DeltaDNA, Chilli Connect, and Vivox) to the platform, it could take some time to fully integrate everything from ironSource, too. We shall see.

To grow and operate outside of ads, we can expect Unity to keep expanding Unity Gaming Services. The company has recently released a self-serve version of its Multiplayer and Matchmaker products. At any rate, there are still many gaps in the solutions that Unity offers in the socio-competitive space. For example, leaderboards, friends, and clans are products that Unity is missing right now, which would work well with the current Multiplayer suite. On top of that, investments in its live-ops solutions, which are mostly limited to A/B testing, would make creating Tournaments and Battle Passes seasons much simpler.

In the long-term, Unity can innovate in the space and use Multiplay (UGS) and Netcode (Editor) to serve solutions, like persistent servers for MMO games, that are not covered by other products in the market. It can also further integrate the editor with UGS products to let developers create, visualize, and test features and live events. Unity might still be behind the competitors in terms of the quality of its Operate products. Nevertheless, it will have a competitive edge if it manages to leverage the synergy between the Unity editor and Operate products. There’s a lot of promise here; now the company just needs to successfully execute.

#2: Playtika Reports Slow Revenue Growth & Declining Profits

Playtika released its Q3 financial earnings, which showed that the company’s situation is still gloomy. It experienced overall revenue growth of only 1.9% year-over-year, with casual games growing by 14.3% and social casino games declining by 10%. The company has also seen an EBITDA decrease of 6.8%, with EBITDA margins now at 35.6%.

As we reported in our September research essay, for the past 2.5 years, Playtika's annual revenue growth has been slowing down and EBTIDA margins continued to drop.

On the slot side, Playtika's biggest slot game — Slotomania — declined by 12.7%. On the other hand, Bingo Blitz, now considered part of the casual portfolio, grew 14.7% year-over-year and is Playtika's top-grossing app. In addition, June's Journey and Solitaire Grand Harvest appear again as top performers, rising 32.5% and 14.3% respectively.

More generally, though, Playtika has been deeply affected by a decrease in revenue in the slots market and Slotomania's loss of a competitive edge. The chart below compares Slotomania’s revenue (in red/pink) versus other top apps from the end of November to now:

Once the biggest slot game on the market, the app has been losing substantial market share. Innovations that Slotomania brought into the market are now must-haves, present in most top-grossing slot games, but Playtika has failed in its further experimentations.

Although the company still experienced growth in its casual business, we‘re skeptical about its sustainability. Most of the increase is still concentrated in three apps: Bingo Blitz, Solitaire Grand Harvest, and June's Journey — all apps that Playtika has been tweaking for a few years. The three apps are also leaders in their respective markets, and while Solitaire Grand Harvest and June's Journey may have space to grow, the situation is different for Playtika's newer top-grossing app, Bingo Blitz. The chart below shows revenue information for the bingo market from November 2020 to now (Bingo Blitz is the large purple area):

Bingo Blitz already represents a massive portion of a market in decline, and we could see its growth soon start to stagnate.

Amid the current situation, Playtika's plan of action is conservative. In its slots portfolio, the company is reducing investment in other slot apps and making economy, content, and feature improvements to Slotomania. Playtika has also recently closed Seriously's studio and moved the operation of Best Fiends games to other offices. The initiatives mentioned can help reduce costs for the company but will hardly impact revenue. Even if Playtika decides to apply its casino playbook to Best Fiends, there is a risk it won't succeed.

Fortunately, Playtika has kept up with developing new games. It recently launched Merge Stories, as covered in our September Market Update, and it currently has three other games in development. However, as we know, the company has yet to launch any successful game through its acquired studios.

So far, Playtika has proven two things: 1) it can innovate and create new trends in the slots market, and 2) it can use its casino playbook to grow casual games that share the same demographic with slot apps. While it would be challenging to pursue growth in the current state of the slots market, there might still be other genres that share a demographic with slots in which Playtika's playbook can thrive. It is now a question of whether Playtika can find them and execute well.

Game Launch Radar

#1: Paradise Fortune Casino Slots

• Publisher: Product Madness (Pixel United)
• State: Soft Launch
• Territories: UK, South Africa, Netherlands, New Zealand, Ireland, Philippines, India
• Classification: Casino - Slots

• Quick thoughts:

  • Paradise Fortune Casino Slots is Product Madness' new slot app. It merges classic slot content with a decorate/narrative meta.
  • We have not seen many new entrants in the slots market recently, so it is nice to see a different app trying to enter the space. The decorate mechanic had already been used as live-ops events in some SpinX Games titles and proved successful.
  • However, we are skeptical whether this will work for Product Madness' new app. Currently, it merges a core and a meta that appeal to entirely different markets. The slots core is not adapted to puzzle & decorate players, and it will overwhelm casual game players, while the meta is a significant part of the game and might annoy core slot players.

#2: Summoners War: Chronicles

• Publisher: Com2uS
• State: Hard Launch
• Territories: Worldwide
• Classification: Action RPG

• Quick thoughts:

  • Summoners Wars: Chronicles is a new MMORPG game by Com2uS.
  • It brings gachas, an element that Summoners Wars made popular years ago. The game is cross-platform and lets users automatize battles. You can watch a video of the gameplay here.
  • From what we can see in Data.ai, this is not Com2uS' first attempt at an MMORPG game. However, the quality of this game is far superior, and it is launched at a time when open world RPGs and MMOs are becoming more popular. Furthermore, the fact that it uses Summoners Wars’ IP might give it a competitive advantage.
  • Com2uS has struggled to launch other successful mid-core titles after Summoners Wars, and this seems like a massive investment for the company.

Other Game Announcements

• Battlefield Mobile has soft-launched in five territories. Link
• The Chainsmokers’ Festival Tycoon on Roblox is the number one branded music experience. Link
• EA to discontinue Project Cars franchise. Link
• Mobile Legends vs Neymar Jr collaboration event to feature exclusive skins. Link
• PUBG Mobile announces Global Chicken Cup with Messi as the captain. Link
• Pokemon Go Fest live events contribute over $300M to local city economies in 2022. Link
• Clash of Clans and Clash Rroyale will be published by Tencent in mainland China. Link
• Anzu will bring in-game ads to Dragon City. Link

Company Announcements

• Applovin revenue is hit by Project Makeover and Matchington Mansion declines. Link
• Israel’s Everybuddy Games raises $15M. Link
• Capcom and Timi are making a new Monster Hunter game. Link
• Nintendo and DeNA are forming a joint venture company, Nintendo Systems. Link
• Take-Two's mobile division is now the dominant revenue stream for the company, boosted by Zynga. Link
• Activision Blizzard reveals its third quarter financials, with mobile now accounting for 52% of the gaming giant's net revenue. Link
• Riot Games to no longer publish major titles through Garena in SEA. Link
• Nintendo reaches latest mobile milestone of 800M downloads. Link
• Bandai Namco H1 sales rise above expectations. Link
• Roblox’s revenue is up 2% as quarterly losses hit $300M. Link
• Playstudio’s financials see continuous growth and expansion of its PlayREWARDS platform. Link
• Krafton profits up to $171.5M despite lowest quarter since 2020. Link
• Approximately 7% of employees are laid off from Kabam after reviewing "strategic priorities." Link

Ecosystem Announcements

• Talking Tom & Friends is the #1 mobile IP of the last ten years. Link
• EU opens in-depth investigation into Activision Blizzard acquisition. Link
• Huawei's AppGallery boasts 580M users and promotes lesser-known games at Editor's Choice Awards 2022. Link
• The NHS may prescribe mobile games to combat anxiety in children and teenagers. Link
• Anything World raises $7.5M to assist content creators, using AI-based animation. Link
• Court dismisses Riot Games' lawsuit against Moonton Technology. Link
• Members of Parliament vote to bolster investment in the European games industry. Link
• Mobile games dominate TIGA Awards 2022. Link

Content Worth Consuming

• Ten years of Candy Crush: How King continues to dominate mobile (GameIndustry.biz): “Looking at Activision Blizzard King's Q3 financials last week, King saw an 8% rise in net bookings year-on-year, which was attributed to the continued strength of the Candy Crush IP. The amount of time users spent within the Candy Crush IP during the quarter also continued growing for the fifth successive quarter. So, it's fair to say that ten years on, Candy Crush isn't going anywhere.” Link
• Publishing Like a Pro: GameFam Spotlight (Game Analytics): “Recently, we’re starting to see more and more hit games launching on the Roblox stores – with one particular publisher shining bright in the ocean of Roblox devs: GameFam. Despite only founding the company in 2019, they’ve worked with a range of Roblox developers and helped publish over 30 successful titles on Roblox. So, what’s their secret? How do they help these developers stand out?“ Link
• Future of esports (Game Makers): “We deep dive into esports, current market and growth projections, what kinds of games do well, business model, structure, prize pools, key trends, geographic differences, and more! Join us with our esteemed group of speakers: Ilaria Caputo (EA), Matthew Kanterman (Ball Metaverse Research Partners), and Hugo Tristao (Newzoo).” Link
• China’s Gaming Regulation Reports (Newzoo): “In this report, we summarize the regulations from the past decade, highlight key learnings from China-based companies’ international strategies, and identify opportunities for international companies looking to enter China.” Link