Unity Software Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; some operating indicators are reported for Q4. Unity provides software to create, operate and monetize interactive 2D and 3D content, with Create Solutions sold mainly by subscription and Operate Solutions primarily usage- or revenue-share-based.
Financial and operating performance
| Metric | FY2020 | FY2019 | Change or context |
|---|---|---|---|
| Revenue | $772.4 million | $541.8 million | Up 43% |
| Create Solutions revenue | $231.3 million | $168.6 million | Up 37% |
| Operate Solutions revenue | $471.2 million | $293.3 million | Up 61%; 61% of total revenue, versus 54% |
| Strategic Partnerships and Other revenue | $70.0 million | $79.8 million | Down 12% |
| Gross profit / gross margin | $600.1 million / 78% | $423.2 million / 78% | Margin flat |
| Operating loss | $274.8 million | $150.7 million | Loss widened |
| Net loss | $282.3 million | $163.2 million | Loss widened; GAAP diluted loss per share was $1.66 versus $2.39 |
| Net cash from operating activities | $19.9 million | Used $67.9 million | Turned positive |
| Free cash flow | Used $20.2 million | Used $95.0 million | Improved; defined as operating cash flow less capital expenditures |
Operating expenses rose to $874.9 million from $573.9 million. Stock-based compensation was $134.6 million, up from $44.5 million. General and administrative expense included a $63.6 million non-cash charge for donating 750,000 shares to a charitable fund. Management’s non-GAAP operating loss was $50.6 million versus $91.8 million; this measure excludes stock compensation, related employer taxes, acquired-intangible amortization and the charitable contribution.
At year-end, cash and cash equivalents were $1.273 billion and marketable securities were $479.4 million, totaling $1.752 billion. Current assets were $2.081 billion and current liabilities $503.2 million. No borrowings were outstanding under the $125 million revolving facility: Unity drew the full amount in March 2020 and repaid it in September. The facility requires minimum liquidity of $75 million; Unity reported compliance with its covenants.
Total liabilities were $634.1 million. Contractual obligations disclosed were $295.6 million, comprising $141.8 million of operating lease payments and $153.9 million of purchase commitments. The company also disclosed $159.0 million of leases not yet commenced, not included in the balance-sheet lease liabilities. A substantial majority of purchase commitments relate to data-center hosting.
Material changes and business indicators
- Growth was driven substantially by existing customers. Customers generating more than $100,000 in trailing 12-month revenue increased to 793 from 600; dollar-based net expansion rose to 138% from 133%.
- In Q4 2020, Unity reported an average of approximately 2.7 billion monthly active end users. Applications built with Unity were downloaded an average of five billion times per month in 2020. Unity estimated that 71% of the top 1,000 mobile games in Q4 were made with Unity.
- Operate Solutions growth reflected greater customer usage and elevated end-user engagement during COVID-19 restrictions. Management attributed approximately $25 million of revenue growth to the pandemic. Strategic Partnerships revenue declined, primarily due to deal delays and certain partners retiring products.
- Operating cash flow improved, but free cash flow remained negative. Investing cash outflow was $575.2 million, including $482.5 million of marketable-security purchases and $53.2 million of acquisition spending. Financing cash inflow was $1.701 billion, primarily reflecting $1.418 billion of net IPO proceeds.
Outlook, risks and unusual items
- The filing provides no formal numerical revenue or earnings guidance. Management expected continuing operating losses as it invests in research and development, sales and marketing, infrastructure and expansion. It expected gross profit to rise in dollars but gross margin to fluctuate, and said free cash flow would remain volatile and likely decline in 2021.
- COVID-19 reduced Create Solutions sales activity modestly and delayed some partnership deals, while boosting Operate Solutions usage. Approximately $40 million of lower travel, event and facilities expenses also benefited 2020 results; management cautioned that these savings and elevated usage may moderate and not recur.
- Apple’s planned limits on access to advertising identifiers and cross-app tracking consent were expected to adversely affect monetization revenue, potentially materially; the timing and size of the impact were uncertain.
- Unity disclosed apparent U.S. export-control and sanctions violations involving some customers. It made initial voluntary self-disclosures to OFAC and BIS in August 2020 and final submissions in February 2021. Potential outcomes include penalties and reputational harm; the filing does not quantify a likely financial impact.
- Other significant risks include reliance on gaming and revenue-share monetization, competition, customer and platform-provider dependence, privacy and data-security regulation, cloud-service availability, execution in non-gaming markets, and continued losses. Unity cited two related putative privacy class actions and a landlord dispute in its risk disclosures, while Item 3 stated it was not party to material pending legal proceedings.
- Unity completed its IPO in September 2020. The audit opinion was unqualified. As a newly public emerging growth company, it did not include management’s report or auditor attestation on internal control over financial reporting; management said disclosure controls were effective.
Most important facts for investors to verify
- Whether Operate Solutions growth and customer expansion can persist as pandemic-related engagement normalizes, and whether revenue becomes less concentrated in monetization.
- The realized effect of Apple privacy changes on advertising performance, Operate Solutions revenue and customer economics.
- Whether rising operating costs and stock-based compensation can be offset by revenue growth, and the path to profitability and positive free cash flow.
- Cash conversion and working-capital exposure, including the timing difference between advertiser collections and publisher payments.
- Progress and potential liabilities relating to export-control disclosures, privacy litigation, and other legal or regulatory matters.
- Future lease and hosting commitments, including the $159.0 million of leases not yet commenced, and continued compliance with the credit facility’s liquidity covenant.