Unity Software Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results are compared with the same 2021 periods. Unity provides software for creating and operating interactive 2D and real-time 3D content; revenue is reported across Create Solutions, Operate Solutions, and Strategic Partnerships and Other.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $322.9m | $286.3m | $940.1m | $794.7m |
| Gross profit / margin | $211.0m / 65% | $222.8m / 78% | $637.5m / 68% | $614.7m / 77% |
| Operating loss | $(239.6)m | $(126.8)m | $(608.5)m | $(386.8)m |
| Net loss | $(250.0)m | $(115.2)m | $(631.7)m | $(371.0)m |
| GAAP net loss per share, diluted | $(0.84) | $(0.41) | $(2.13) | $(1.32) |
Q3 revenue grew about 13% year over year, but gross profit fell as cost of revenue rose. For the nine months, revenue grew about 18%, while the operating and net losses widened. Stock-based compensation was $154.5m in Q3 and $376.1m for the nine months.
- Q3 revenue by source: Create Solutions $128.6m, up from $83.7m; Operate Solutions $171.7m, down from $185.0m; Strategic Partnerships and Other $22.6m, up from $17.6m.
- Nine-month revenue by source: Create Solutions $365.9m versus $226.7m; Operate Solutions $514.2m versus $514.5m; Strategic Partnerships and Other $59.9m versus $53.4m.
- Cash flow, nine months: Operating cash use was $10.4m versus $71.9m in 2021. Free cash flow, as defined by Unity, was negative $52.7m versus negative $99.9m; capital expenditures were $42.3m.
- Liquidity and debt: Cash and cash equivalents were $1.239bn and marketable securities were $446.8m at quarter end. Convertible notes had $1.725bn principal and a $1.706bn carrying amount; the notes are 0% senior notes due 2026. Current liabilities were $611.7m.
Changes, outlook, and notable items
- Unity attributed Create growth to new customers and expansion among existing customers. Q3 Operate revenue declined amid earlier data-quality and accuracy issues, competition, weaker macroeconomic conditions, and reduced advertiser spending. The company said its interventions through Q3 had been effective, but expected these external pressures to adversely affect Operate revenue growth into 2023.
- Dollar-based net expansion rate fell to 111% from 142% a year earlier. Customers generating more than $100,000 in trailing-12-month revenue increased to 1,075 from 973.
- Management said it was slowing hiring and containing expense growth, while continuing investment. It expected ongoing GAAP operating losses for the foreseeable future and said existing liquidity should cover working capital and capital expenditures for at least 12 months. This filing does not provide a clear numerical revenue or earnings forecast.
- On November 7, 2022, after quarter end, Unity completed its approximately $2.8bn stock-funded ironSource acquisition. It also issued $1.0bn of 2.0% convertible notes due 2027; proceeds were expected to partially fund a board-authorized share repurchase program of up to $2.5bn. The acquisition’s initial accounting was not complete when disclosed.
- Unity reported a putative securities class action alleging misleading statements or omissions about platform issues and their effect on fiscal 2022 guidance; the company said it believed the case was without merit and intended to defend it. A separate ironSource-related stockholder complaint was withdrawn.
- Key risks include persistent losses, Operate performance and advertising-market weakness, platform privacy or policy changes, competition, macroeconomic and foreign-exchange pressures, acquisition integration, and the potential dilution and added debt associated with the ironSource transaction and convertible notes.
Important facts for investors to verify
- Whether Operate Solutions stabilizes and how advertiser demand and competition affect growth into 2023.
- Whether Create Solutions growth and improving cash use can offset rising operating expenses and continued GAAP losses.
- The integration costs, realized benefits, and dilution effects of the ironSource acquisition, including actual repurchases under the announced program.
- Liquidity and capital commitments, including the $1.725bn 2026 notes, new 2027 notes, and substantial hosting-related purchase commitments.
- Developments in the securities litigation and the effects of privacy, platform-policy, tax, and macroeconomic changes.