Unity Software Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing was signed August 2, 2023. Unity provides Create Solutions for developing interactive content and Grow Solutions for monetization, user acquisition, and game publishing. Unless indicated otherwise, financial figures below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $533.5 | $297.0 | $1,033.8 | $617.2 |
| Gross profit | $374.7 | $200.2 | $713.0 | $426.5 |
| GAAP gross margin | 70% | 67% | 69% | 69% |
| Operating loss | $(191.5) | $(197.7) | $(446.4) | $(368.8) |
| Net loss | $(193.3) | $(204.2) | $(447.0) | $(381.7) |
| Adjusted EBITDA (non-GAAP) | $98.7 | $(37.6) | Not stated in the provided filing text | Not stated in the provided filing text |
Q2 revenue increased about 80% year over year; six-month revenue rose about 67%. Create Solutions revenue was $193.1 million in Q2, up from $164.6 million; Grow Solutions revenue was $340.4 million, up from $132.4 million. Management attributed the overall increase primarily to inclusion of ironSource revenue in Grow Solutions, and Create growth to new and existing customers. The filing does not quantify organic growth separately.
Q2 sales and marketing expense rose to $209.1 million from $100.9 million; research and development expense rose to $268.0 million from $216.0 million. Higher costs included acquired-intangible amortization, ironSource-related expenses, and restructuring costs. GAAP net loss per share was $0.51, compared with $0.69 in Q2 2022. Q2 adjusted gross margin was 81%, versus 75% a year earlier; adjusted measures are non-GAAP.
Cash flow and liquidity: For the six months, operating cash flow was $42.5 million, down from $58.4 million; capital expenditures were $28.5 million, yielding free cash flow of $14.1 million versus $28.1 million. Investing activities provided $73.5 million, principally from maturities of short-term investments; financing activities provided $41.9 million, from employee equity plans. Cash, cash equivalents, and restricted cash totaled $1.655 billion at June 30; balance-sheet cash and cash equivalents were $1.641 billion, with no short-term investments outstanding. Management cited $1.6 billion of cash, cash equivalents, and short-term investments as principal liquidity and expects existing liquidity to cover working capital and capital expenditures for at least 12 months.
Debt and balance sheet: Convertible notes had $2.725 billion principal outstanding ($2.709 billion carrying value), comprising $1.725 billion of 0% notes due 2026 and $1.0 billion of 2% notes due 2027. Total liabilities were $4.019 billion; current liabilities were $975.1 million. Goodwill was $3.201 billion and net intangible assets $1.725 billion. Accumulated deficit was $2.695 billion.
Material changes versus the prior comparable period
- Revenue growth was driven substantially by the ironSource merger, completed in November 2022; Create Solutions also grew. Grow Solutions contributed $340.4 million in Q2 compared with $132.4 million in the prior-year quarter.
- Dollar-based net expansion rate fell to 106% from 121%, primarily reflecting softness in Grow Solutions and the advertising market. Unity excludes Strategic Partnerships and, beginning in Q1 2023, Supersonic from this metric.
- Gross margin improved to 70% from 67% in Q2, while six-month GAAP gross margin remained 69%. GAAP operating and net losses narrowed in Q2 but widened for the six-month period.
- Unity announced a workforce reduction of approximately 8% in May and recorded about $25 million of related expenses, primarily transition, severance, and benefits costs.
- Cash and cash equivalents increased from $1.485 billion at year-end 2022; short-term investments declined from $101.7 million to zero. The share count increased to 383.3 million from 374.2 million at year-end.
Outlook, commentary, risks, and unusual items
- Unity expects to continue incurring GAAP operating losses for the foreseeable future. It expects gross profit to increase in absolute dollars over the long term, but gross margin to fluctuate; it also expects investment in research and development and sales and marketing. The filing gives no numerical revenue or earnings guidance for the next quarter or full year.
- Management identified inflation, higher interest rates, limited credit availability, a soft advertising market, and restrictions affecting gaming in China as factors that have affected or may affect growth. It said the full impact is uncertain.
- Q2 included approximately $25 million in workforce-reduction costs. Non-GAAP adjusted EBITDA also excludes stock-based compensation, acquired-intangible amortization, restructuring and other specified items; it should not be treated as GAAP earnings or cash flow.
- Material risks include customer retention and expansion, advertising demand and privacy/platform changes, competition, execution and integration of ironSource, product reliability and cybersecurity, evolving AI and privacy regulation, and ongoing GAAP losses. Management stated that ironSource-related internal-control integration work remained in progress, with completion expected during 2023; disclosure controls were assessed as effective.
- Unity is defending a securities class action alleging misleading statements about product-platform issues and 2022 guidance. Related derivative suits are stayed pending the class-action dismissal motions. Unity says it believes the class action is without merit; the outcome is uncertain. Management generally did not expect outstanding legal matters to have a material adverse effect, while noting litigation outcomes cannot be predicted with certainty.
- The $2.5 billion share-repurchase authorization had $1.0 billion remaining at June 30; Unity repurchased no shares during Q2. The company notes repurchases are discretionary and may be affected by liquidity, market conditions, and the 1% excise tax.
Important facts for investors to verify
- How much of reported revenue growth reflects ironSource inclusion versus comparable organic performance, particularly in Grow Solutions.
- Whether the 106% dollar-based net expansion rate stabilizes or declines further, and how advertising-market conditions affect Grow Solutions.
- Progress toward sustainable operating cash flow and GAAP profitability, including the impact of restructuring, stock-based compensation, and acquired-intangible amortization.
- Liquidity available after restricted cash, contractual purchase commitments, and the $2.725 billion convertible-note principal; note maturities and potential conversion or repayment implications.
- Developments in the securities and derivative litigation, ironSource internal-control integration, and material product, privacy, cybersecurity, platform, or AI-related risks.