Unity Software Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. Comparisons are with the corresponding 2020 periods. Unity provides software to create, operate, and monetize interactive real-time 2D and 3D content. Its revenue streams are Create Solutions, Operate Solutions, and Strategic Partnerships and Other.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $273.6m | $184.3m | $508.3m | $351.3m |
| Gross profit / gross margin | $215.8m / 79% | $143.9m / 78% | $391.9m / 77% | $279.0m / 79% |
| Operating loss | ($149.2m) | ($24.8m) | ($260.1m) | ($52.3m) |
| Net loss | ($148.3m) | ($27.4m) | ($255.8m) | ($54.1m) |
| Basic and diluted loss per share | ($0.53) | ($0.21) | ($0.92) | ($0.42) |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | ($115.6m) | ($15.4m) |
| Free cash flow | Not separately reported for the quarter | Not separately reported for the quarter | ($134.1m) | ($34.7m) |
Q2 revenue grew 48% year over year. Create Solutions revenue rose 31% to $72.4m, Operate Solutions rose 63% to $182.9m, and Strategic Partnerships and Other rose 9% to $18.3m. For the first half, these streams grew 40%, 52%, and 11%, respectively. Operate Solutions contributed about 65% of first-half revenue.
At June 30, cash and cash equivalents were $1,001.9m and marketable securities were $587.1m, totaling approximately $1.589bn; restricted cash was a further $10.8m. Total current assets were $1.995bn and current liabilities were $556.4m. Total liabilities were $691.9m, including operating lease liabilities; Unity reported no outstanding borrowings and terminated its revolving credit facility in April 2021. Accumulated deficit was $1.055bn.
For the first half, investing cash outflow was $203.8m, including $69.4m for acquisitions and net purchases of marketable securities; financing cash inflow was $38.1m, solely from stock-option exercises. Cash, cash equivalents, and restricted cash decreased by $281.2m. Management said existing liquidity should cover working capital and capital expenditures for at least 12 months.
Material changes and notable items
- Q2 operating expenses rose to $365.0m from $168.7m. Research and development increased 81%, sales and marketing 71%, and general and administrative 240% year over year.
- Q2 GAAP loss included a $49.8m lease-termination charge, including construction-in-progress write-offs. The lease termination agreement involved a one-time $43.5m payment; the filing does not reconcile that payment amount to the larger expense charge.
- Stock-based compensation was $85.4m in Q2 and $152.0m for the first half, versus $12.0m and $21.7m in the prior-year periods. First-half cash flow also reflected bonus payments, higher payroll taxes on equity compensation, prepayments, working-capital growth, and a real-estate payment.
- Q2 GAAP gross margin improved one percentage point year over year, while first-half gross margin declined two points. Management attributed the first-half decline primarily to higher personnel costs and revenue mix. Q2 non-GAAP gross margin was 81%; non-GAAP operating loss was $3.2m and non-GAAP net loss was $4.4m. These measures exclude, among other items, stock compensation and the lease-termination charge.
- Unity acquired Metaverse Technologies for $45.7m cash and Visual Live for approximately $24.8m during the first half. Subsequent to quarter-end, it completed two acquisitions for approximately $20m each and agreed to acquire a remote-access streaming technology company for $320m, subject to closing conditions.
- Unity adopted the expected-credit-loss accounting standard in January 2021, recording a $1.5m cumulative-effect reduction to accumulated deficit.
Outlook, management commentary, and risks
- Unity expects operating losses to continue for the foreseeable future as it invests in research and development, sales and marketing, and administrative capacity. It expects gross profit to increase in absolute dollars, while gross margin may fluctuate; the filing provides no specific full-year revenue or earnings guidance.
- Management said customer growth and expansion supported revenue growth: customers contributing more than $100,000 of trailing-12-month revenue increased to 888 from 716, and the dollar-based net expansion rate was 142% in both years. No customer represented more than 10% of revenue.
- Unity expects Apple’s iOS tracking and advertising-identifier changes to adversely affect monetization revenue and potentially other Operate Solutions; the timing and magnitude were uncertain, and management warned the impact could be material.
- COVID-19 had not adversely affected total revenue, cash flows, or overall financial condition to date. Increased Operate demand and pandemic-related expense reductions could moderate, while renewed disruptions, customer spending changes, and higher costs as employees return to offices remain uncertain.
- Key risks include dependence on Operate Solutions and gaming customers, customer and end-user usage, platform-provider policies and privacy regulation, competition, cloud-hosting providers, international and China exposure, cybersecurity, execution of acquisitions and expansion beyond gaming, and continued losses and cash use.
- The filing reports no material pending legal proceedings and no material changes to internal control over financial reporting during the quarter. It notes prior voluntary disclosures to U.S. authorities concerning apparent export-control or sanctions violations; OFAC issued a cautionary letter and declined monetary penalties.
Important facts for investors to verify
- How Apple’s privacy changes affect advertising monetization, Operate revenue, and customer demand.
- Whether strong revenue growth can translate into improving GAAP margins, reduced operating losses, and lower cash burn as expenses and stock-based compensation rise.
- The cash and financing implications, integration progress, and expected returns of the announced acquisitions, particularly the proposed $320m transaction.
- The distinction between the $49.8m lease-termination expense and the stated $43.5m payment, and the effect of ongoing lease and hosting commitments.
- Whether customer expansion, retention, and adoption in non-gaming industries can sustain growth amid competitive, regulatory, and platform risks.