Unity Software Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unity provides software for creating and growing interactive 2D and 3D content through Create Solutions and Grow Solutions. Results include ironSource, acquired in November 2022, which materially affects year-over-year comparisons.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $544.2 million | $322.9 million | $1,578.0 million | $940.1 million |
| Gross profit / margin | $392.9 million / 72% | $211.0 million / 65% | $1,105.9 million / 70% | $637.5 million / 68% |
| Operating loss | $127.4 million | $239.6 million | $573.8 million | $608.5 million |
| Net loss | $125.3 million | $250.0 million | $572.3 million | $631.7 million |
| Adjusted EBITDA (non-GAAP) | $131.0 million | $(31.2) million | Not provided in the cited filing text | Not provided in the cited filing text |
- Q3 revenue increased 69% year over year, mainly due to ironSource revenue in Grow Solutions. Create Solutions revenue was essentially flat at $188.9 million; Grow Solutions revenue was $355.3 million, versus $133.7 million.
- For the first nine months, Create Solutions revenue grew 10% to $569.4 million, while Grow Solutions revenue rose to $1,008.7 million, largely reflecting ironSource. Management also cited the return of certain ironSource customer incentives in the Q3 Grow comparison.
- Q3 GAAP gross margin improved to 72%. Operating expenses totaled $520.3 million, or 95% of revenue, compared with $450.6 million, or 140%, a year earlier. The company remained GAAP loss-making.
- For the nine months, operating cash flow was $162.6 million, versus cash used of $10.4 million in 2022. Free cash flow, as defined by Unity, was $118.0 million, versus negative $52.7 million. Investing activities provided $55.4 million; financing activities used $185.0 million, including $250.0 million of share repurchases.
- At September 30, cash and cash equivalents were $1.507 billion; cash, cash equivalents and restricted cash totaled $1.521 billion. Short-term investments were nil. Current liabilities were $950.4 million.
- Convertible notes had $2.725 billion principal and a $2.711 billion balance-sheet carrying amount: $1.725 billion of 0% notes due 2026 and $1.0 billion of 2% notes due 2027. The filing says no holders had exercised conversion rights, and the notes were not convertible at holders’ option as of quarter-end.
Changes, outlook and risks
- In Q3, Unity announced Create Solutions pricing changes effective in 2024. The company reported substantial negative customer feedback, including a boycott and slower signing of new contracts and renewals. It said the response had not materially affected Q3 results; long-term effects remained uncertain.
- In Q4 2023, Unity announced a CEO change and began a portfolio review focused on core Create and Grow offerings. Management said the review could lead to discontinued offerings, workforce reductions and a smaller office footprint; timing and financial effects were not quantifiable in the filing.
- John Riccitiello retired as CEO in October 2023. James Whitehurst was appointed interim CEO, and the board was searching for a permanent successor.
- Unity expected continued GAAP operating losses but said existing liquidity should cover working capital and capital expenditures for at least 12 months. No numerical revenue or earnings guidance is provided in the cited filing text.
- Management identified advertising-market softness, gaming restrictions in China, macroeconomic uncertainty, and geopolitical instability in Israel—where significant Grow operations are located—as business risks. Other material risks include customer retention and pricing acceptance, competition, platform and privacy-policy changes, cybersecurity, and achieving ironSource integration benefits.
- Unity reported a pending securities class action alleging misleading statements about platform issues and fiscal 2022 guidance; motions to dismiss were awaiting a ruling. Related derivative suits were stayed. Unity stated it believed outstanding matters would not materially adversely affect its business or financial statements, while noting litigation outcomes are uncertain. A separate withdrawn merger-disclosure suit resulted in a $100,000 fee payment in Q4 2023.
Key facts investors should verify
- Whether the 2024 Create pricing changes lead to customer losses, slower renewals, or a measurable revenue effect.
- How much reported Grow Solutions growth reflects ironSource consolidation and incentives versus underlying organic performance.
- Progress and costs from the portfolio review, potential workforce and office reductions, and the permanent CEO search.
- Whether operating cash flow and free cash flow remain positive, and how cash generation compares with GAAP losses and stock-based compensation.
- Debt maturity, conversion and refinancing implications, alongside remaining share-repurchase capacity ($750 million at September 30, 2023).
- Developments in the securities litigation, Israel-related operational exposure, and advertising, China, privacy and platform-policy risks.