Unity Software Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 29, 2024. Unity provides software for creating, running, and monetizing interactive 2D and 3D content. Its two solution groups are Create and Grow. The 2023 results include ironSource, acquired in November 2022, for a full year; the prior-year comparison includes it only from the acquisition date.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $2.187 billion | $1.391 billion |
| Create Solutions revenue | $859 million | $716 million |
| Grow Solutions revenue | $1.328 billion | $675 million |
| Gross profit / gross margin | $1.454 billion / 66% | $949 million / 68% |
| Operating loss | $833 million | $882 million |
| Net loss attributable to Unity | $822 million; $2.16 per diluted share | $921 million; $2.96 per diluted share |
| Adjusted EBITDA (non-GAAP) | $448 million | $(71) million |
| Cash from operating activities | $235 million | $(59) million |
| Free cash flow (non-GAAP) | $179 million | $(117) million |
Revenue rose about 57%, largely because Grow Solutions included a full year of ironSource. Management also cited a $72 million return of pre-merger customer incentives in Grow revenue, which it does not expect to recur materially. Create revenue growth included about $99 million in the fourth quarter from amending Wētā FX’s subscription rights for a perpetual license. The company recorded substantial acquired-intangible amortization, including costs associated with that Wētā FX amendment. Adjusted EBITDA improved sharply, but excludes, among other items, $649 million of stock-based compensation and $515 million of acquired-intangible amortization in 2023.
Dollar-based net expansion rate fell to 104% from 116%, primarily due to competition in Grow. Customers generating over $100,000 of trailing-12-month revenue declined to 1,304 from 1,340; management attributed the decrease partly to de-emphasizing professional services and hosting and a more competitive monetization market.
Liquidity, debt, and financial position
- Year-end cash and cash equivalents were $1.590 billion; current assets were $2.325 billion and current liabilities $894 million.
- Convertible notes had a $2.7 billion net carrying amount: $1.725 billion of 0% notes due 2026 and $1.0 billion of 2% notes due 2027. The notes were not convertible at holders’ option at December 31, 2023.
- Management said existing liquidity should cover working capital and capital expenditures for at least 12 months, while noting potential need for additional capital. It expects GAAP operating losses for the foreseeable future.
- Non-cancelable commitments totaled $3.664 billion, including $2.805 billion of note principal and interest, $688 million of purchase commitments (mostly hosting), and $172 million of operating lease obligations.
- The company repurchased $250 million of shares in 2023; $750 million remained under its $2.5 billion authorization through November 2024.
Outlook, changes, and key risks
- Portfolio and restructuring: Following a CEO change in late 2023, Unity began focusing on the Unity Engine, monetization, and AI, while planning to reduce professional services and hosting hardware offerings and cease further development of artistry tools. These activities generated about $280 million of 2023 revenue. Unity recorded $70 million of restructuring and reorganization costs in 2023, including $16.5 million of lease-asset impairment. In January 2024 it committed to eliminate about 25% of its workforce and estimated roughly $195 million of separation costs, primarily in the first quarter. The company also announced office closures in about 14 locations.
- Pricing and customers: Unity’s announced Create pricing changes drew significant negative feedback, including a boycott and slower contract signings and renewals. Management believes this hurt Grow revenue in the second half of 2023; the long-term effect remains uncertain. The new pricing was expected to take effect with a major software release in 2024.
- Market and execution risks: Management cited advertising competition, China gaming restrictions, macroeconomic uncertainty, and geopolitical instability in Israel, where significant Grow operations are located. It expects Grow competition to continue in 2024. Integration and anticipated synergies from ironSource, customer retention, and successful cost reductions remain execution risks.
- Leadership: James Whitehurst was interim CEO following John Riccitiello’s October 2023 departure; the board was searching for a permanent CEO.
- Legal and controls: Unity is defending a securities class action alleging misleading statements about platform issues and 2022 guidance, along with related derivative suits; outcomes are uncertain. Management and the auditor concluded internal control over financial reporting was effective. The auditor issued unqualified opinions on the financial statements and internal controls.
- Guidance: The filing does not provide specific numeric revenue or earnings guidance. Management’s stated expectations include near-term reductions in certain expenses as it resets the portfolio, but timing and effects of restructuring are uncertain.
Important facts for investors to verify
- How much reported growth and adjusted EBITDA depend on ironSource consolidation and non-recurring items, including the $72 million incentive return and Wētā FX license amendment.
- Whether customer response to the Create pricing changes improves, and whether renewal trends and the 104% expansion rate stabilize.
- Whether workforce and office reductions deliver sustainable savings, and how actual separation costs compare with the estimated $195 million.
- How much cash the business generates after hosting commitments, debt service, restructuring costs, and share repurchases.
- Whether Unity can manage $2.7 billion of convertible notes and other contractual obligations while continuing to incur GAAP losses.
- Developments in the CEO search, securities litigation, China operations, and Israel-related business continuity risks.