Unity Software Inc. — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited report covers the three months ended March 31, 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, so year-over-year comparisons reflect the acquisition as well as underlying performance.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $500.4 million | $320.1 million |
| Gross profit / margin | $338.4 million / 68% | $226.3 million / 71% |
| Operating loss | $255.0 million | $171.2 million |
| Net loss | $253.7 million | $177.6 million |
| Adjusted EBITDA (non-GAAP) | $32.5 million | $(22.9) million |
| Operating cash flow | $(5.1) million | $101.3 million |
| Free cash flow (non-GAAP) | $(19.4) million | $86.4 million |
Revenue increased 56% year over year. Create Solutions revenue was $187.4 million, up from $164.5 million; Grow Solutions revenue was $313.0 million, up from $155.6 million, primarily reflecting ironSource revenue. Gross margin contracted by 3 percentage points. Operating expenses rose to $593.4 million from $397.5 million, including higher personnel costs and acquired-intangible amortization. Stock-based compensation was $163.0 million.
At March 31, cash and cash equivalents were $1.594 billion, with no short-term investments reported; current assets were $2.343 billion and current liabilities $980.2 million. The company reported $1.6 billion of cash, cash equivalents and short-term investments as principal liquidity and said it could meet working capital and capital expenditure needs for at least 12 months. Convertible notes had $2.725 billion of principal ($2.708 billion net carrying amount): $1.725 billion due 2026 and $1.0 billion due 2027. The company had $1.0 billion remaining under its share repurchase authorization and made no repurchases in the quarter.
Material changes versus the prior comparable period
- Revenue growth was driven mainly by the ironSource merger’s contribution to Grow Solutions; Create Solutions also grew.
- Dollar-based net expansion rate declined to 107% from 135%, which management attributed primarily to Grow Solutions and advertising-market softness.
- Net cash from operating activities fell to a $5.1 million outflow from $101.3 million provided, reflecting the net loss and working-capital movements, including payment of the prior-year corporate bonus.
- Loss attributable to Unity widened to $253.0 million from $177.6 million; basic and diluted loss per share was $0.67 versus $0.60.
Outlook, risks, contingencies and unusual items
- No specific quarterly or full-year revenue or earnings guidance is provided in the filing. Management expects GAAP operating losses to continue for the foreseeable future and says gross margin may fluctuate.
- Management cited inflation, higher interest rates, a stronger U.S. dollar, constrained credit and weakness in advertising as factors that have negatively affected, and may continue to affect, the business. It also noted softness in China.
- Unity recorded approximately $14 million of restructuring and reorganization costs in Q1. In May 2023, it announced a further workforce reduction of approximately 600 roles and estimated approximately $26 million of severance costs, substantially in Q2.
- Material business risks include retaining customers and improving Grow product effectiveness, advertising-market and platform-policy changes, privacy and data regulation, competition, integration of ironSource, and the history of GAAP losses. The company also disclosed that less than 5% of its cash and cash equivalents was held at Silicon Valley Bank above FDIC-insured limits; it reported no operational impact from the bank’s closure.
- A securities class action alleges misleading statements or omissions concerning platform issues and 2022 guidance; Unity says it believes the suit is without merit and intends to defend it. Related federal derivative suits are stayed pending motions to dismiss. Other legal matters are described, but the filing says their resolution is not currently expected to have a material adverse effect; outcomes remain uncertain.
- Management concluded disclosure controls were effective. Integration of ironSource-specific financial reporting controls was ongoing, with completion expected during fiscal 2023.
Important facts for investors to verify
- How much of Grow Solutions’ reported growth reflects ironSource, and whether organic demand and advertising monetization are improving.
- Whether the decline in dollar-based net expansion rate stabilizes or reverses, and how customer retention develops.
- Whether Unity can improve GAAP profitability and cash generation while managing operating expenses, stock-based compensation and acquired-intangible amortization.
- Cash availability and future cash needs relative to $2.725 billion of note principal, contractual commitments and the remaining share repurchase authorization.
- Actual restructuring costs and savings, ironSource integration progress, and developments in the securities and derivative litigation.