Unity Software Inc. — Q3 2021 Form 10-Q
Period: Quarter ended September 30, 2021; comparisons are with Q3 and the nine months ended September 30, 2020. Amounts below are USD millions unless noted. Interim financial statements are unaudited.
Business context
Unity provides software to create, operate and monetize interactive real-time 2D and 3D content. Revenue comes from Create Solutions, Operate Solutions, and Strategic Partnerships and Other. Operate Solutions include advertising monetization and usage-based cloud services.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $286.3 | $200.8 | $794.7 | $552.1 |
| Gross profit / margin | $222.8 / 78% | $153.2 / 76% | $614.7 / 77% | $432.3 / 78% |
| Operating loss | $(126.8) | $(141.7) | $(386.8) | $(194.0) |
| Net loss | $(115.2) | $(144.7) | $(371.0) | $(198.8) |
| Basic and diluted loss per share | $(0.41) | $(0.97) | $(1.32) | $(1.47) |
- Q3 revenue rose 43% year over year; nine-month revenue rose 44%. Operate Solutions grew 54% in Q3 and 53% for the nine months; Create Solutions grew 34% and 38%, respectively.
- Q3 gross margin improved two percentage points year over year; nine-month gross margin declined one point. Management cited product optimization and lower unit costs in Operate Solutions for the Q3 improvement.
- Q3 operating loss narrowed, partly reflecting the prior-year $63.6 million charitable stock donation charge. Nine-month operating loss widened as operating expenses increased; R&D rose 72% and sales and marketing 64%.
- Stock-based compensation was $97.3 million in Q3 and $249.3 million for the nine months, versus $61.8 million and $83.5 million, respectively, in 2020. GAAP losses remain substantial despite narrower Q3 net loss.
- Cash, cash equivalents and marketable securities totaled $1.280 billion at September 30, versus $1.752 billion at December 31, 2020. Total current assets were $1.637 billion and current liabilities $579.0 million.
- For the first nine months, operating cash flow was $(71.9) million and free cash flow, a non-GAAP measure, was $(99.9) million. Investing cash flow was $(509.0) million, including $425.2 million for acquisitions; financing cash flow was $53.2 million.
- No debt was outstanding at quarter-end. Unity terminated its $125 million revolving credit facility in April 2021. Lease liabilities totaled $122.4 million; contractual purchase commitments were $603.3 million, substantially related to data-center hosting.
Changes, outlook and notable items
- Trailing-12-month customers contributing more than $100,000 in revenue increased to 973 from 739. Dollar-based net expansion rate was 142%, compared with 144% a year earlier.
- Operate Solutions represented 65% of nine-month revenue, up from 61%. Management attributed growth mainly to higher usage by existing customers, alongside new customer additions.
- Unity completed acquisitions including Parsec for approximately $333 million cash and Metaverse for approximately $45.7 million cash. Goodwill increased to $638.9 million from $286.3 million at year-end.
- After quarter-end, Unity agreed to acquire certain Weta Digital assets for $1.625 billion—$1.0 billion cash and $625 million in Unity stock—subject to closing conditions. Management said the deal could materially affect liquidity, financial condition and results.
- No quantified financial guidance is provided in the supplied filing text. Management expects continued investment and operating losses for the foreseeable future, while stating existing liquidity is expected to cover working capital and capital expenditures for at least 12 months. It expects gross profit to grow in dollars, with gross margin fluctuating.
- Risks highlighted include Apple’s advertising-tracking privacy changes and broader privacy regulation; dependence on Operate Solutions and gaming customers; competition and customer retention; cloud-hosting reliance and substantial hosting commitments; execution and integration risks from acquisitions; and uncertainty around COVID-19 effects and return-to-office costs.
- Management reported no material pending legal proceedings and concluded disclosure controls were effective at a reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Operate Solutions growth and customer usage remain durable, especially amid privacy-policy changes and potential moderation of pandemic-era engagement.
- How operating expenses, headcount and stock-based compensation affect the path to profitability and cash generation.
- The cash, stock dilution, integration costs and expected returns associated with the Weta Digital transaction, as well as its closing conditions.
- Whether hosting commitments, including the five-year cloud agreement with $580 million of aggregate minimum commitments, support growth without undermining margins or liquidity.
- How acquisition-related goodwill and intangible assets perform, and whether future results require impairment charges.