Unity Software Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Unity provides software to create, operate, and monetize interactive 2D and 3D content. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $234.8 million | $167.0 million | +41% |
| Gross profit / margin | $176.0 million / 75% | $135.1 million / 81% | Margin down 6 percentage points |
| Operating loss | $110.9 million | $27.4 million | Loss widened |
| Net loss | $107.5 million | $26.7 million | Loss widened |
| GAAP diluted loss per share | $0.39 | $0.21 | Loss per share increased |
| Cash used in operations | $88.9 million | $32.0 million | Use of cash increased |
| Free cash flow | $(100.6) million | $(39.6) million | Use of cash increased |
Revenue by source was $70.4 million from Create Solutions (+51%), $146.6 million from Operate Solutions (+40%), and $17.8 million from Strategic Partnerships and Other (+12%). Operate Solutions represented about 62% of revenue in both periods. Management attributed growth primarily to existing-customer expansion and higher Operate usage; Create growth also reflected new customers.
Operating expenses rose to $286.9 million from $162.6 million, including research and development of $154.0 million (+88%), sales and marketing of $69.8 million (+61%), and general and administrative of $63.1 million (+68%). Stock-based compensation was $66.6 million, versus $9.7 million; management cited increased headcount and IPO-related vesting as important cost drivers. Non-GAAP operating loss was $23.4 million versus $13.4 million, and non-GAAP net loss was $27.3 million versus $13.6 million.
Liquidity, debt, and cash flow
At March 31, Unity held $1.120 billion in cash and cash equivalents and $527.3 million in marketable securities, totaling $1.647 billion; total current assets were $2.010 billion and current liabilities were $490.6 million. The company reported no outstanding borrowings under its revolving facility and said $125 million was available. The filing also states in a subsequent-events note that the facility was terminated “in April 2020,” which conflicts with its description as available at March 31, 2021; verify the facility’s status and the stated date.
Operating cash outflow was $88.9 million; investing cash outflow was $89.6 million, including $24.8 million for an acquisition and $11.7 million of capital expenditures, partly offset by marketable-security maturities and repayments. Financing provided $22.6 million, solely from stock-option exercises. Cash, cash equivalents, and restricted cash declined by $155.9 million during the quarter.
Contractual commitments included $155.6 million of operating lease payments and $129.0 million of purchase commitments, mostly for data-center hosting. A further $136.8 million of minimum payments for a lease not yet commenced was not reflected on the balance sheet. The company also disclosed $135.4 million in recorded lease liabilities. Accumulated deficit was $906.5 million.
Material changes and management commentary
- Gross margin fell from 81% to 75%, with management citing higher personnel costs, revenue mix, and hosting costs. Hosting expense increased as the business scaled.
- Unity reported 837 customers contributing more than $100,000 of trailing-12-month revenue, up from 668 a year earlier. Dollar-based net expansion rate rose to 140% from 133%.
- Unity acquired Visual Live 3D for approximately $24.8 million in cash, adding $19.9 million of goodwill. It also signed an agreement for another acquisition expected to close in Q2 2021; the transaction was described as not significant.
- Management said existing liquidity should cover working capital and capital expenditures for at least 12 months, while expecting operating losses to continue for the foreseeable future as it invests in product development, sales, marketing, and infrastructure.
- Apple implemented its iOS opt-in tracking permission requirement in April 2021. Unity expected adverse effects on monetization revenue and potentially other Operate Solutions, possibly material, but did not quantify the impact.
- COVID-19 had not adversely affected overall revenue, cash flows, or financial condition to date. Higher Operate engagement had supported demand, but management expected that benefit and pandemic-related expense savings to moderate; future impacts remained uncertain.
Risks, contingencies, and unusual items
- Unity continued to incur substantial losses and warned it may not achieve or sustain profitability. Competition, customer retention, reliance on gaming and Operate Solutions, and the ability to scale efficiently are significant business risks.
- Privacy and platform-policy changes, including Apple’s tracking requirements, may constrain advertising measurement and monetization. The company also faces evolving global privacy, data-security, and children’s-protection requirements.
- The company disclosed a dispute with a San Francisco landlord concerning lease-premises compliance. A former senior employee’s lawsuit was ordered to arbitration; Unity denied the allegations. The filing says it was not party to any material pending legal proceeding, while describing these matters elsewhere.
- Unity reported voluntary self-disclosures to U.S. authorities concerning apparent export-control and sanctions violations; OFAC issued a cautionary letter declining monetary penalties. The company cannot assure that future violations will be prevented.
- Q1 included $12.4 million of stock-based compensation related to modified awards for the former CFO’s separation agreement; $10.3 million was expected to be recognized in Q2 2021. The quarter also included a $1.5 million cumulative-effect adjustment to accumulated deficit upon adoption of the expected-credit-loss standard.
- No quantitative full-year revenue, earnings, or cash-flow guidance is provided in the supplied filing text.
Important facts for investors to verify
- How Apple’s tracking-permission changes affect Operate Solutions revenue, margins, and customer demand.
- Whether revenue growth and the 140% net expansion rate persist as pandemic-related engagement benefits moderate.
- The trajectory of hosting costs, gross margin, stock-based compensation, and cash burn relative to revenue growth.
- The status of the $125 million revolving facility, given the conflicting availability and termination disclosures, and the economics of future lease commitments.
- Developments in the landlord dispute, arbitration matter, and export-control compliance, as well as the financial implications of the uncommenced lease and purchase commitments.