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Unity Software (U -8%) is ready to start anew in FY24 following extensive turbulence, from a CEO shake-up to mass layoffs. The software development provider, enabling developers to create video games, animation, and simulations, started a two-phase company reset late last year after a pricing change implemented by former CEO John Riccitiello sparked intense backlash among Unity's customers. Mr. Riccitiello implemented a new fee based on installs instead of an annual fee, disincentivizing developers from growing the popularity of their games.

However, even after this abrupt pricing change, which prompted Mr. Riccitiello to step down, Unity still grew its core subscription business, excluding China, by 18% yr/yr in Q4. This robust growth underscored Unity's competitive edge in video game development software. The company is looking to lean on what it does best as a company during phase two of its reset. Management noted that the second phase is about reigniting revenue growth, which it anticipates will accelerate during the back half of FY24, maintaining attractive levels after that while improving profitability.

• Profitability will be a key gauge of how well Unity's turnaround progresses. In Q4, Unity registered another net loss; it has yet to deliver a profitable quarter since going public in 2020. However, as part of its broader turnaround plan, Unity has reset its cost structure, reducing its workforce by 25%. As a result, the company projects exiting FY24 with 25% adjusted EBITDA margins, up 9 pts from the 16% delivered in Q4 when excluding its Weta FX license agreement, which was already an 11 pt improvement from 4Q22.
• In connection with its reset, Unity announced that its portfolio would be realigned with its core businesses: Engine, Cloud, and Monetization. This new unit, dubbed "Strategic Portfolio," will help Unity narrow investments in new businesses to those aligned with its renewed focus. It also is exiting businesses that do not meet its core focus.
• Improving its Grow segment's performance is another strategic pillar underlying Unity's expectations of returning to accelerated growth this year. Grow allows customers to grow their user base and monetize their content. Interim CEO James Whitehurst remarked that it is currently focused on user acquisition through stronger models, which he believes will accelerate growth.
• Looking ahead to 2024, Unity only issued guidance for its new Strategic Portfolio group, projecting revs of $415-420 mln in Q1 and $1.76-1.80 bln for the year.

Investors are not expressing much confidence in a swift turnaround for Unity today, dragging shares back to late 2023 lows. Last quarter, we mentioned that shares may start to rebound once Unity presents information regarding its portfolio review. We think that Unity's actions are ultimately the right steps toward reigniting growth. Unity showcased its software's resilience by still growing its core subscription business by a healthy margin despite backlash over a new fee schedule. By trimming underperforming businesses and focusing on what it does best, Unity may finally get out of its funk.