Unity Software Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the provided filing text does not give a clear standalone Q4 income statement or cash-flow result. Unity provides real-time 2D and 3D creation tools and services, plus advertising, user-acquisition and monetization products. It completed its ironSource merger on November 7, 2022, organizing the business into Create and Grow Solutions.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $1.391B | $1.111B | Up 25%; FY2022 includes ironSource revenue from the acquisition date |
| Create Solutions revenue | $716.1M | $506.9M | Up 41% |
| Grow Solutions revenue | $674.9M | $603.6M | Up 12%; includes ironSource, partly offset by weaker monetization revenue before acquisition |
| Gross profit / margin | $948.5M / 68% | $856.9M / 77% | Margin down 9 percentage points |
| Operating loss | $(882.2)M | $(531.7)M | Loss widened as expenses grew faster than revenue |
| Net loss | $(919.5)M | $(532.6)M | Basic and diluted loss per share: $(2.96), versus $(1.89) |
| Operating cash flow / free cash flow | $(59.4)M / $(116.6)M | $(111.4)M / $(153.4)M | Cash use improved; FCF includes $57.1M of property and equipment purchases |
Operating expenses rose to $1.831B from $1.389B. Stock-based compensation was $550.1M, versus $347.2M. Non-GAAP operating loss was $90.1M versus $35.9M; non-GAAP net loss was $106.1M versus $43.2M. These company-defined non-GAAP measures exclude substantial items, including stock compensation and acquired-intangible amortization.
At year-end, cash and cash equivalents were $1.485B and short-term investments were $101.7M. Current assets were $2.365B and current liabilities $1.010B. Convertible notes had $2.725B aggregate principal outstanding, with a $2.707B carrying value. Unity repurchased $1.5B of shares in 2022; $1.0B remained under its $2.5B repurchase authorization.
Material changes and management commentary
- Revenue grew, but GAAP gross margin declined and operating and net losses widened. Higher personnel costs, hosting expenses, acquired-intangible amortization, acquisition costs and other investment spending contributed to expense growth.
- Create growth reflected new and existing customers. Grow revenue benefited from ironSource, while Unity’s monetization business faced product accuracy and data-quality issues earlier in 2022, reduced advertiser spending, macroeconomic pressure and competition. Management said corrective actions through Q4 were effective, but external conditions were expected to weigh on Grow growth into 2023.
- Dollar-based net expansion rate fell to 116% from 140%, which management attributed primarily to weakness in Grow Solutions. The number of customers contributing more than $100,000 of trailing-12-month revenue rose to 1,340 from 1,052; ironSource also contributed to the increase.
- Management expects GAAP operating losses to continue for the foreseeable future and said existing liquidity should cover working capital and capital expenditures for at least 12 months. The filing provides no specific revenue or earnings guidance.
- Unity attributed improved free cash flow partly to approximately $200M of prepaid four-year Weta FX license fees; other cash uses included the prior-year bonus payment, software-license prepayments and working-capital growth.
Risks, contingencies and unusual items
- Key risks include continued losses, uncertain realization of ironSource synergies, competition, advertising-market softness, macroeconomic and currency effects, reliance on mobile platforms and their privacy rules, data security and privacy compliance, and the ability to integrate acquired operations and systems.
- A securities class action and two related derivative suits allege misleading statements or nondisclosure concerning platform issues and 2022 guidance. Unity says it believes the claims are without merit and intends to defend them. A separate lawsuit related to merger disclosures was withdrawn. The filing says resolution of outstanding legal matters is uncertain, though management did not expect them, based on current knowledge, to have a material adverse effect.
- The ironSource acquisition was recorded at approximately $2.916B of consideration, including $1.270B of acquired intangible assets and $1.543B of goodwill. Its results are included only from November 7; pro forma FY2022 revenue assuming ownership from January 1 was $2.017B, and pro forma net loss was $983.6M. These unaudited figures are illustrative, not forecasts.
- Unity issued $1.0B of 2.0% convertible notes due 2027 in connection with the merger, in addition to $1.725B of 0% convertible notes due 2026. The 2027 notes were not holder-convertible at year-end.
- The financial-statement audit and the audit of internal control over financial reporting received unqualified opinions. However, Unity excluded ironSource from its 2022 internal-control assessment while integration work continued; it expected to complete that integration during 2023.
Important facts for investors to verify
- How much of reported growth and future Grow performance is attributable to ironSource, and whether monetization product accuracy and data quality remain improved.
- Whether advertiser demand and customer expansion recover, particularly given the 116% net expansion rate and management’s warning about Grow growth into 2023.
- Whether gross-margin pressure, high stock-based compensation and acquisition-related amortization continue, and how reported non-GAAP measures reconcile to GAAP results.
- Cash consumption, hosting commitments and debt obligations, alongside the remaining share-repurchase authorization and dilution from merger-related share issuance.
- Progress integrating ironSource’s financial controls and systems, and developments in the securities and derivative litigation.