Unity Technologies Q4 FY12/23 Earnings Review
Want To Own A Restructuring Play? This Is What Restructuring Looks Like.
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Not For The Impatient
by Alex King
Unity Technologies ($U) should offer investors a compelling combination of growth (because it serves the gaming market) and cash generation (because it is the leading provider of content creation tools and runtime environments). Vertical market oligopolistic software companies can be very strong long term investment opportunities, as $VEEV and others attest.
Unfortunately the company has been poorly managed in recent years, in my opinion. Profitability and cashflow have not been prioritized at all and when, in recent months, low rates of growth began to weigh heavily on the stock, the company committed an unforced error by trying to impose a new an unpopular fee structure on its developer partners.
Cue, finally, the ejection of the CEO. (In our coverage of this stock elsewhere we have long said, the CEO is in need of being ejected). The CFO remains; we shall see how that works out. Activist investor Silver Lake Group remains a 9% shareholder in the business and just now appointed one of their own, James Whitehurst, as interim CEO. Whitehurst was CEO of Red Hat Software during its go-go years running up to the sale to IBM; he is no slouch. The company also has a grownup board of directors (though their slowness to replace the prior CEO may be called into question), including top brass from Sequoia Capital and Silver Lake.
The company is now in the middle of a major restructuring project. The shareholder letter published yesterday (here) is worth reading - it lays out what they plan to do and why and when. There’s nothing new under the sun in there - cut the poor-value divisions, cut staff hard, cut opex and capex, then refocus on growing the high value division - that’s Restructuring 101 - but if you’re unfamiliar with such programs it does a good job in explaining the plan.
The numbers are a mess at present; you would not own this or buy it expecting a short-term breakout in growth. There are plenty easier ways to make money than owning a restructuring play, which can take months or years to pay out, or can simply go wrong and die on the vine.
Personally I do own $U stock and indeed have been accumulating it in small bite sizes of late. I’ll walk through the logic below for our paying members here, together with an update on the earnings print from yesterday after the close, and our stock price outlook and rating.