Unity Software Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unity provides creation and monetization software for interactive 2D/3D content through Create Solutions and Grow Solutions. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $460.4 million | $500.4 million |
| Gross profit / margin | $316.0 million / 69% | $338.4 million / 68% |
| Operating loss | $374.9 million | $255.0 million |
| Net loss | $291.5 million | $253.7 million |
| Net loss attributable to Unity | $291.1 million; $0.75 per share | $253.0 million; $0.67 per share |
| Adjusted EBITDA (non-GAAP) | $78.5 million | $32.5 million |
| Operating cash flow / free cash flow | $(7.4) million / $(14.6) million | $(5.1) million / $(19.4) million |
Revenue declined 8% year over year. Create Solutions revenue was $163.7 million, down from $187.4 million; Grow Solutions revenue was $296.7 million, down from $313.0 million. GAAP operating expenses rose to $690.9 million from $593.4 million, with general and administrative expense increasing to $177.6 million from $96.8 million. Stock-based compensation was $265.9 million, versus $163.0 million.
At March 31, cash and cash equivalents were $1.180 billion, down from $1.590 billion at year-end; cash, cash equivalents and restricted cash totaled $1.195 billion. Current assets were $1.941 billion and current liabilities $902.2 million. Convertible notes had a net carrying amount of $2.236 billion, with principal outstanding of approximately $2.245 billion. Total liabilities were $3.339 billion.
Changes and significant items
- Revenue declines reflected the termination of the Wētā FX subscription, lower cloud and hosting usage, and increased Grow Solutions advertising competition. Core Create subscription growth, excluding Wētā, partially offset the decline.
- In January, Unity committed to reducing its workforce by approximately 25% and mutually agreed to the departure of the ironSource founders. Q1 included approximately $193 million of employee separation costs, including $126 million of incremental stock-based compensation, and $19 million of other restructuring costs, primarily office closures.
- Unity repurchased $480 million principal amount of its 2026 notes for $415 million, recording a $61.4 million pre-tax gain. Financing cash outflow included $415.0 million of note repayments.
- Unity’s dollar-based net expansion rate was 101%, compared with 102% a year earlier. Customers contributing more than $100,000 of trailing-12-month revenue increased to 1,243 from 1,214.
- Remaining performance obligations on contracts with original terms over one year were $357 million; Unity expects to recognize approximately $205 million, or 57%, in the next 12 months.
Outlook, risks and contingencies
The filing does not provide a clear numerical revenue or earnings forecast. Management said it expects GAAP operating losses for the foreseeable future, while believing available liquidity is sufficient for working capital and capital expenditures for at least the next 12 months. It expects gross profit to increase over the long term but decrease in the short term as the portfolio reset proceeds; short-term operating expenses are also expected to decrease from the reset. Unity stated that execution timing and the full financial impact remain uncertain.
Unity is focusing on its “Strategic Portfolio”—the Unity Engine, Cloud and Monetization—and narrowing or exiting other activities. Non-strategic portfolios contributed approximately $34 million of Q1 revenue, which Unity expects to decline through the remainder of 2024. In Q2, after the reporting period, Unity announced Matthew Bromberg as permanent CEO and President, effective May 15, 2024.
Key disclosed risks include continuing losses and execution of the portfolio reset; customer response to the announced Create pricing changes; competition in advertising and gaming; macroeconomic pressures and China gaming restrictions; Israel-related disruption to Grow operations; privacy, platform-policy and AI-related risks; and debt, liquidity and potential dilution. A securities class action and related derivative suits remain outstanding; the company intends to defend the cases. Management said resolution of outstanding matters is not currently expected to materially adversely affect the company, but litigation outcomes are uncertain. The filing reports disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Unity had $750 million remaining under its share repurchase authorization as of March 31, 2024. Contractual commitments totaled $3.123 billion, including $643.5 million of purchase commitments, primarily for data-center hosting, and $2.325 billion of convertible-note principal and interest.
Investor facts to verify
- Whether Create and Grow revenue trends, customer retention and the 101% net expansion rate stabilize or improve.
- Whether workforce and portfolio changes reduce recurring costs without impairing product execution, customer support or growth.
- How much of the reported adjusted EBITDA improvement reflects sustainable operations versus excluded restructuring, stock compensation and other adjustments.
- Cash consumption, hosting-related commitments, and the company’s ability to manage remaining 2026 and 2027 note obligations.
- Developments in the securities and derivative litigation, the Israel situation, and regulatory or platform changes affecting advertising and data use.