Unity crashes 36% as guidance shows slowing growth, ad delay could hurt revenue for a year
Unity Software (NYSE:U) shares crashed on Wednesday after the video game development software company posted weak first-quarter results and offered guidance that forecast sharply slowing growth, with investment firm Credit Suisse highlighting a major impact on its ad monetization tool.
Analyst Stephen Ju, who rates Unity (U) outperform, lowered the per-share price target to $137 from $160, noting that a $110 million impact on Unity Ads caused the weak guidance, due to reduced targeting efficacy.
"Issues likely began in [fourth-quarter 2021], when Unity noted that it had been ingesting 'bad data' from a large customer - on top of which its targeting algorithms were being built," Ju wrote in a note to clients.
"And due to the compounding nature of the issue, ad spend/revenue was not impacted materially until [February/March] following sustained strength in [January] - as advertisers rotated budgets into other channels given performance deterioration."
Unity Software (U) fell more than 36% to $30.80 in early trading on Wednesday.
For the period ending March 31, Unity (U) said it lost an adjusted $0.08 per share on $320.13 million in revenue. A consensus of analysts was expecting the company to lose an adjusted $0.08 per share on $321.17 million in sales.
Unity (U) forecast sharply slowing growth for the second quarter, saying it expects sales to be between $290 million and $295 million, compared to estimates of $359.65 million. At the low end, that would represent just 6% year-over-year growth, compared to 36.3% growth in the first quarter.
For the full-year, Unity (U) expects sales to be within a range of $1.35 billion and $1.425 billion, compared to estimates of $1.49 billion, implying revenue will grow between 22% and 28% year-over-year.
Although Unity Ads impacted guidance, Ju noted that Unity's (U) management discussed "ongoing efforts" to rebuild its data sets to retrain the algorithm, but that is likely to impact revenue "over time" and not be a quick fix.
Citi analyst Jason Bazinet said the $110 million shortfall in Unity Ads is likely to cause "shares to trade lower."
Going into earnings, Wall Street analysts were mixed on Unity's (U) revenue prospects, with one analyst raising their estimates, while two cut their estimates.