Unity Software(U) - 2024 Q2 - Quarterly Report

FORM 10-Q Filing Information General Information This Form 10-Q for Unity Software Inc covers the quarter ended June 30, 2024, for the large accelerated filer trading on the NYSE under the symbol 'U' - Unity Software Inc filed its Quarterly Report on Form 10-Q for the period ended June 30, 2024[2] - The company's common stock is registered on The New York Stock Exchange under the trading symbol 'U'[1] - Unity Software Inc is classified as a large accelerated filer[2] - As of August 1, 2024, there were 396,857,800 shares of the registrant's common stock outstanding[2] Note Regarding Forward-Looking Statements and Risk Factor Summary Forward-Looking Statements Disclaimer This report contains forward-looking statements subject to substantial risks and uncertainties, and readers are cautioned not to rely on them as predictions of future events - The report contains forward-looking statements that involve substantial risks and uncertainties, and readers should not rely on them as predictions of future events[4] - Actual results, events, or circumstances could differ materially from those described in forward-looking statements due to various unpredictable risks and assumptions[4][7] Key Risk Factor Summary Unity faces critical risks including a history of GAAP losses, challenges in its portfolio reset, customer retention, intense competition, and geopolitical instability - The company has a history of losses and may not achieve or sustain GAAP profitability in the future[4] - Failure to successfully execute plans to reset the portfolio to focus on Strategic Portfolio and right-size investments could harm the business[4] - Inability to retain existing customers, expand their use, or attract new customers could adversely affect growth and operating results[6] - Changes to the Create Solutions pricing model in Q3 2023 led to negative customer feedback, a boycott, and a slowdown in new contracts/renewals, negatively impacting Grow Solutions revenue[6] - Increased competition in the advertising market and ongoing restrictions in the China gaming industry have impacted growth rates[7] - Ongoing geopolitical instability, particularly in Israel where a significant portion of Grow Solutions operations is located, has impacted and may further adversely affect the business[7] - The company has recently experienced significant management turnover, and the ability to successfully manage executive transitions and retain senior executives is critical[7] PART I—FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents Unity's unaudited condensed consolidated financial statements and detailed notes for the periods ended June 30, 2024, and December 31, 2023 Condensed Consolidated Balance Sheets Total assets decreased to $6.68 billion and total liabilities decreased to $3.27 billion as of June 30, 2024, from year-end 2023 Key Balance Sheet Data | Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :---------------------------------- | :--------------------------------- | :----------------------------------- | | Cash and cash equivalents | $1,267,957 | $1,590,325 | | Total current assets | $1,984,066 | $2,324,891 | | Total assets | $6,683,734 | $7,243,441 | | Total current liabilities | $841,542 | $894,103 | | Convertible notes | $2,237,245 | $2,711,750 | | Total liabilities | $3,267,158 | $3,829,063 | | Total stockholders' equity | $3,190,520 | $3,188,581 | Condensed Consolidated Statements of Operations The company reported a reduced net loss of $125.7 million for Q2 2024 compared to the prior year, despite a decrease in revenue to $449.3 million Key Operational Results | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenue | $449,259 | $533,478 | $909,639 | $1,033,839 | | Gross profit | $340,384 | $374,651 | $656,377 | $713,048 | | Total operating expenses | $469,804 | $566,103 | $1,160,726 | $1,159,484 | | Loss from operations | $(129,420) | $(191,452) | $(504,349) | $(446,436) | | Net loss attributable to Unity Software Inc | $(125,574) | $(192,160) | $(416,648) | $(445,191) | | Basic and diluted net loss per share | $(0.32) | $(0.51) | $(1.07) | $(1.18) | Condensed Consolidated Statements of Comprehensive Loss Comprehensive loss improved to $126.7 million for Q2 2024 from $201.2 million in the prior year, influenced by net loss and currency adjustments Comprehensive Loss Summary | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net loss | $(125,738) | $(193,324) | $(417,216) | $(447,027) | | Other comprehensive loss | $(1,393) | $(11,539) | $(4,854) | $(8,709) | | Comprehensive loss | $(127,131) | $(204,863) | $(422,070) | $(455,736) | | Comprehensive loss attributable to Unity Software Inc | $(126,712) | $(201,193) | $(420,537) | $(452,043) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity remained stable at $3.19 billion as of June 30, 2024, as stock-based compensation offset the net loss for the period Stockholders' Equity Summary | Metric | As of December 31, 2023 (in thousands) | As of June 30, 2024 (in thousands) | | :--------------------------------------- | :----------------------------------- | :--------------------------------- | | Common Shares | 384,871,561 | 395,444,298 | | Additional Paid-In Capital | $6,259,479 | $6,682,060 | | Accumulated Deficit | $(3,071,830) | $(3,488,478) | | Total Unity Software Inc Stockholders' Equity | $3,182,642 | $3,184,686 | | Total Equity | $3,188,581 | $3,190,520 | - Stock-based compensation expense for the six months ended June 30, 2024, was $386.97 million[18] - Net loss for the six months ended June 30, 2024, was $(416.65) million[18] Condensed Consolidated Statements of Cash Flows Net cash from operations increased to $81.0 million for the first half of 2024, though overall cash decreased due to convertible note repayments Cash Flow Summary | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $81,003 | $42,544 | | Net cash provided by (used in) investing activities | $(16,316) | $73,493 | | Net cash provided by (used in) financing activities | $(377,697) | $41,944 | | Increase (decrease) in cash, cash equivalents, and restricted cash | $(322,470) | $149,196 | | Cash, cash equivalents, and restricted cash, end of period | $1,281,797 | $1,654,884 | - Repayments of convertible notes amounted to $414.999 million during the six months ended June 30, 2024[22] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, revenue disaggregation, financial instruments, leases, borrowings, and significant restructuring events 1. Accounting Policies The financial statements are prepared under U.S. GAAP and reflect significant employee separation and restructuring costs incurred in H1 2024 - In January 2024, Unity committed to a plan to eliminate approximately 25% of its workforce, incurring $201 million in incremental employee separation costs in the six months ended June 30, 2024, including $128 million of incremental stock-based compensation[25] - In November 2023, Unity committed to reassessing its real estate footprint, incurring $38 million of restructuring costs, primarily related to office closures, in the six months ended June 30, 2024[25] 2. Revenue Revenue from both Create and Grow Solutions declined in the first half of 2024 compared to the prior year, with remaining performance obligations at $352 million Revenue by Segment | Revenue Source | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Create Solutions | $150,777 | $193,110 | $314,447 | $380,479 | | Grow Solutions | $298,482 | $340,368 | $595,192 | $653,360 | | Total revenue | $449,259 | $533,478 | $909,639 | $1,033,839 | Revenue by Geography | Revenue Geography | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | United States | $130,843 | $141,905 | $269,962 | $274,899 | | Greater China | $62,063 | $69,750 | $121,753 | $129,298 | | EMEA | $164,064 | $188,219 | $330,834 | $374,943 | | APAC | $81,119 | $119,107 | $165,155 | $226,635 | | Other Americas | $11,170 | $14,497 | $21,935 | $28,064 | | Total revenue | $449,259 | $533,478 | $909,639 | $1,033,839 | - Revenue recognized during the six months ended June 30, 2024, that was included in the deferred revenue balances at January 1, 2024, was $124.7 million[30] - As of June 30, 2024, remaining performance obligations for contracts with original terms exceeding one year totaled $352 million, with approximately $203 million (58%) expected to be recognized in the next 12 months[30] 3. Financial Instruments This note details the fair value of cash and cash equivalents, with equity investments in unconsolidated entities remaining unchanged at $33.6 million Fair Value of Cash and Equivalents | Metric | June 30, 2024 Fair Value (in thousands) | December 31, 2023 Fair Value (in thousands) | | :------------------------------------------ | :-------------------------------------- | :---------------------------------------- | | Cash | $978,584 | $834,877 | | Restricted cash and cash equivalents | $303,213 | $769,390 | | Total cash, cash equivalents, and restricted cash | $1,281,797 | $1,604,267 | - Equity investments in unconsolidated entities without readily determinable fair value totaled $33.6 million as of June 30, 2024, and December 31, 2023, with no adjustments to carrying value in the reported periods[33] 4. Investment in Unity China Unity China's results are consolidated, with the redeemable noncontrolling interest balance increasing to $226.1 million as of June 30, 2024 - Third-party investors hold a 20.5% ownership interest in Unity China, with redeemable noncontrolling interests recorded as temporary equity[34] Redeemable Noncontrolling Interests Activity | Metric | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :------------------------------------------ | | Balance at beginning of period | $224,736 | $225,797 | | Net loss attributable to redeemable noncontrolling interests | $(153) | $(529) | | Accretion for redeemable noncontrolling interests | $2,867 | $5,942 | | Balance at end of period | $226,056 | $226,056 | 5. Leases Total lease expense was $23.3 million for H1 2024, with $12.2 million in impairment charges recorded as part of a real estate footprint reassessment Lease Expense Summary | Lease Expense Type | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Operating lease expense | $10,579 | $10,375 | $20,832 | $19,768 | | Total lease expense | $11,524 | $11,099 | $23,254 | $21,386 | - During the six months ended June 30, 2024, Unity recorded $12.2 million of impairment charges on operating lease assets due to reassessing its real estate footprint[37] Lease Assets and Liabilities | Lease Liability Metric | As of June 30, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :--------------------- | :--------------------------------- | :----------------------------------- | | Operating lease assets | $90,444 | $113,256 | | Total operating lease liabilities | $126,950 | $150,801 | 6. Borrowings Unity had $2.2 billion in convertible notes outstanding as of June 30, 2024, after repurchasing $480 million of 2026 Notes for a $61.4 million gain Convertible Notes Summary | Convertible Notes | Carrying Amount as of June 30, 2024 (in thousands) | Carrying Amount as of December 31, 2023 (in thousands) | | :---------------- | :----------------------------------------------- | :------------------------------------------------- | | Principal – 2026 Notes | $1,245,232 | $1,725,000 | | Principal – 2027 Notes | $1,000,000 | $1,000,000 | | Net carrying amount | $2,237,245 | $2,711,750 | - During Q1 2024, Unity repurchased $480 million principal of 2026 Notes for $415 million, resulting in a pre-tax gain of $61.4 million[41][42] - Interest expense on convertible notes for the six months ended June 30, 2024, was $11.9 million[40] 7. Commitments and Contingencies Total non-cancelable contractual commitments were $3.07 billion as of June 30, 2024, primarily from convertible notes and purchase commitments Contractual Commitments | Commitment Type | Total (in thousands) | Remainder of 2024 (in thousands) | 2025-2026 (in thousands) | 2027-2028 (in thousands) | Thereafter (in thousands) | | :---------------- | :------------------- | :------------------------------- | :----------------------- | :----------------------- | :------------------------ | | Operating leases | $148,332 | $21,494 | $65,856 | $40,223 | $20,759 | | Purchase commitments | $611,190 | $148,449 | $433,317 | $29,424 | — | | Convertible note principal and interest | $2,315,232 | $10,000 | $1,285,232 | $1,020,000 | — | | Total | $3,074,754 | $179,943 | $1,784,405 | $1,089,647 | $20,759 | - Unity is subject to a putative securities class action complaint and related derivative suits, which it intends to vigorously defend[110] - As of June 30, 2024, Unity had $13.8 million in secured letters of credit outstanding, primarily for office space leases, fully collateralized by certificates of deposit[49] 8. Stock-Based Compensation Stock-based compensation expense increased to $381.3 million for H1 2024, driven by modifications related to the departure of ironSource founders Stock-Based Compensation Expense by Category | Expense Category | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :----------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Cost of revenue | $7,911 | $19,801 | $24,717 | $38,650 | | Research and development | $56,908 | $71,058 | $144,646 | $147,541 | | Sales and marketing | $22,282 | $34,680 | $86,253 | $70,197 | | General and administrative | $28,298 | $31,999 | $125,660 | $64,178 | | Total stock-based compensation expense | $115,399 | $157,538 | $381,276 | $320,566 | - Incremental stock-based compensation expense of $97 million for the six months ended June 30, 2024, was primarily due to modifications of awards held by ironSource Ltd founders who departed in Q1 2024[50] Stock Options Activity | Stock Options Activity | Balance as of December 31, 2023 | Balance as of June 30, 2024 | | :--------------------- | :------------------------------ | :-------------------------- | | Stock Options Outstanding | 31,541,466 | 28,449,481 | | Weighted-Average Exercise Price | $19.35 | $19.85 | RSU Activity | RSU Activity | Unvested as of December 31, 2023 | Unvested as of June 30, 2024 | | :------------- | :------------------------------- | :--------------------------- | | Number of Shares | 37,332,551 | 28,243,612 | | Weighted-Average Grant-Date Fair Value | $38.31 | $34.49 | 9. Income Taxes The effective tax rate differed from the U.S. statutory rate due to a valuation allowance on U.S. losses and tax expense on foreign earnings - The effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to a valuation allowance on U.S. losses and tax expense on foreign earnings[60] - A tax benefit on foreign losses was recorded in Q1 2024 in connection with employee separation costs, and tax restructuring efforts reduced the U.S. valuation allowance[60] - As of June 30, 2024, gross unrecognized tax benefits were $185.9 million, with $30.7 million potentially impacting the effective tax rate if recognized[60] 10. Net Loss per Share of Common Stock Basic and diluted net loss per share were identical as the effects of potentially dilutive securities were antidilutive due to the company's net loss - Basic and diluted net loss per share are identical because potentially dilutive items were antidilutive due to net losses[61] Potentially Dilutive Securities | Potentially Dilutive Common Stock | As of June 30, 2024 (in thousands) | As of June 30, 2023 (in thousands) | | :-------------------------------- | :--------------------------------- | :--------------------------------- | | Convertible notes | 24,488 | 26,042 | | Stock options and PVOs | 28,449 | 32,342 | | Unvested RSUs and PVUs | 28,244 | 32,165 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for Q2 2024, covering its portfolio reset, key metrics, operational results, and liquidity position Overview Unity provides a leading platform for creating and growing interactive, real-time 3D content through its Create and Grow Solutions - Unity is the world's leading platform for creating and growing interactive, real-time 3D (RT3D) content and experiences, including AI solutions[64] - The platform comprises Create Solutions and Grow Solutions, forming a strategic portfolio around the Unity Engine, Cloud, and Monetization[64] Impact of Macroeconomic Trends and Geopolitical Events Business is affected by negative macroeconomic factors, increased advertising competition, China's gaming restrictions, and geopolitical instability in Israel - Negative macroeconomic factors (inflation, high interest rates, limited credit) contribute to economic uncertainty and volatility, potentially harming the business[65] - Increased competition in the advertising market and ongoing restrictions in China's gaming industry have impacted and may continue to impact growth rates[65] - Geopolitical instability, especially in Israel where a significant portion of Grow Solutions operates, may adversely affect the business[65] Recent Developments in Our Business Unity initiated a portfolio reset, completed a ~25% workforce reduction, and appointed new executive leadership in the first half of 2024 - Unity began a portfolio reset in Q4 2023, focusing on its Strategic Portfolio (Unity Engine, Cloud, Monetization, AI) and exiting non-strategic businesses[66] - In H1 2024, Unity substantially completed workforce reductions (~25%) and office footprint optimization, resulting in $201 million in employee separation costs and $38 million in non-employee charges[66] - Matthew Bromberg was appointed permanent CEO and President in Q2 2024, and Mark Barrysmith became Interim CFO in August 2024 following Luis Visoso's departure[66][67] Key Metrics The number of high-value customers increased year-over-year, while the dollar-based net expansion rate declined to 96% due to advertising market competition High-Value Customer Count | Metric | As of June 30, 2024 | As of June 30, 2023 | | :------------------------------------ | :------------------ | :------------------ | | Customers contributing > $100,000 revenue | 1,254 | 1,227 | Dollar-Based Net Expansion Rate | Metric | As of June 30, 2024 | As of June 30, 2023 | | :---------------------------- | :------------------ | :------------------ | | Dollar-based net expansion rate | 96% | 103% | - The decrease in dollar-based net expansion rate is primarily attributable to Grow Solutions, due to increased competition in the advertising market[70] Results of Operations Total revenue decreased in H1 2024, but net loss improved due to reduced operating expenses and a gain from convertible note repurchases Key Financial Results | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $449,259 | $533,478 | $909,639 | $1,033,839 | | Gross profit | $340,384 | $374,651 | $656,377 | $713,048 | | Loss from operations | $(129,420) | $(191,452) | $(504,349) | $(446,436) | | Net loss | $(125,738) | $(193,324) | $(417,216) | $(447,027) | Key Financial Ratios | Metric (as % of Revenue) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gross profit | 76% | 70% | 72% | 69% | | Total operating expenses | 105% | 106% | 127% | 112% | | Loss from operations | (29)% | (36)% | (55)% | (43)% | | Net loss | (28)% | (36)% | (46)% | (43)% | Revenue Total revenue decreased due to declines in both Create Solutions, from a terminated subscription, and Grow Solutions, from increased advertising competition Revenue by Segment | Revenue Source | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Create Solutions | $150,777 | $193,110 | $314,447 | $380,479 | | Grow Solutions | $298,482 | $340,368 | $595,192 | $653,360 | | Total revenue | $449,259 | $533,478 | $909,639 | $1,033,839 | - Decrease in Create Solutions revenue was driven by the termination of the subscription agreement with Wētā FX Limited and portfolio reset impacts on professional services and cloud/hosting[79] - Decrease in Grow Solutions revenue was negatively impacted by increased competition in the advertising market[79] Cost of Revenue, Gross Profit, and Gross Margin Cost of revenue decreased due to headcount reductions and lower hosting expenses, leading to an increase in gross margin despite lower total revenue - Cost of revenue decreased due to reductions in headcount, decreased hosting expenses from portfolio decisions, and lower amortization expenses related to intangible assets[80] - Gross margin as a percentage of revenue increased to 76% for the three months ended June 30, 2024 (from 70% in 2023) and to 72% for the six months ended June 30, 2024 (from 69% in 2023)[75] Operating Expenses Operating expenses for H1 2024 increased due to $201 million in employee separation costs from the workforce reduction plan initiated in Q1 2024 - Operating expenses include $201 million in incremental employee separation costs for the six months ended June 30, 2024, largely from accelerated and modified equity awards due to a ~25% workforce reduction[81] Operating Expense Breakdown | Operating Expense Category | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Research and development | $208,935 | $267,955 | $491,663 | $548,435 | | Sales and marketing | $169,854 | $209,131 | $400,479 | $425,258 | | General and administrative | $91,015 | $89,017 | $268,584 | $185,791 | | Total operating expenses | $469,804 | $566,103 | $1,160,726 | $1,159,484 | Interest Expense Interest expense decreased in H1 2024, consistent with the company's reduced outstanding debt obligations following convertible note repurchases Interest Expense Summary | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :--------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Interest expense | $(5,829) | $(6,142) | $(11,864) | $(12,271) | - Interest expense decreased in line with outstanding debt obligations[85] Interest Income and Other Income (Expense), Net Other income increased significantly in H1 2024, driven by a $61.4 million gain on the repurchase of convertible debt in Q1 2024 Other Income Summary | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Interest income and other income (expense), net | $10,457 | $9,061 | $87,100 | $22,676 | - The increase for the three months ended June 30, 2024, was primarily due to gains from foreign exchange[88] - The increase for the six months ended June 30, 2024, was primarily due to a $61.4 million gain on the repurchase of convertible debt in Q1 2024[88] Provision for (benefit from) Income taxes The company recorded a tax benefit in H1 2024 due to foreign losses related to employee separation costs and ongoing tax restructuring efforts Income Tax Summary | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Provision for (benefit from) Income taxes | $946 | $4,791 | $(11,897) | $10,996 | - The decrease was primarily due to a tax benefit from foreign losses related to employee separation costs and continued tax restructuring efforts in Q1 2024[89] Non-GAAP Financial Measures Unity uses non-GAAP measures like Adjusted Gross Profit, Adjusted EBITDA, and Free Cash Flow to supplement its GAAP results for performance evaluation - Adjusted Gross Profit is defined as GAAP gross profit excluding stock-based compensation, amortization of acquired intangible assets, depreciation, and restructuring/reorganization costs[91] - Adjusted EBITDA is defined as net income or loss excluding stock-based compensation, amortization of acquired intangible assets, depreciation, acquisitions, restructurings, insurance reimbursement, interest, income tax, and other non-operating activities[91] - Free Cash Flow is defined as net cash provided by operating activities less cash used for purchases of property and equipment[95] Adjusted Gross Profit Reconciliation | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | GAAP gross profit | $340,384 | $374,651 | | Adjusted gross profit | $377,271 | $434,261 | | GAAP gross margin | 76% | 70% | | Adjusted gross margin | 84% | 81% | Adjusted EBITDA Reconciliation | Metric | Three Months Ended June 30, 2024 (in thousands) | Three Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | GAAP net loss | $(125,738) | $(193,324) | | Adjusted EBITDA | $113,469 | $98,748 | Free Cash Flow Reconciliation | Metric | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $81,003 | $42,544 | | Purchases of property and equipment | $(15,956) | $(28,468) | | Free cash flow | $65,047 | $14,076 | Liquidity and Capital Resources Unity holds $1.3 billion in cash and equivalents and believes its liquidity is sufficient for the next 12 months despite historical operating losses - As of June 30, 2024, principal sources of liquidity were cash and cash equivalents totaling $1.3 billion[98] - Material cash requirements include convertible notes ($2.2 billion outstanding) and operating leases[98] - Unity has an accumulated deficit of $3.5 billion as of June 30, 2024, and expects to continue incurring GAAP operating losses[98] - The company believes existing liquidity will be sufficient for working capital and capital expenditures for at least the next 12 months[98] Cash Flow Summary | Cash Flow Activity | Six Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by operating activities | $81,003 | $42,544 | | Net cash provided by (used in) investing activities | $(16,316) | $73,493 | | Net cash provided by (used in) financing activities | $(377,697) | $41,944 | | Net change in cash, cash equivalents, and restricted cash | $(322,470) | $149,196 | - Net cash used in financing activities was primarily due to repayments of convertible notes[103] Critical Accounting Policies and Estimates There have been no material changes to Unity's critical accounting policies and estimates since its 2023 Annual Report on Form 10-K - No material changes to critical accounting policies and estimates since the 2023 Annual Report on Form 10-K[104] Item 3. Quantitative and Qualitative Disclosures About Market Risk Unity's assessment of its exposures to market risk has not materially changed since the presentation in its 2023 Annual Report on Form 10-K - No material changes to market risk exposures since the 2023 Annual Report on Form 10-K[105] Item 4. Controls and Procedures Management concluded that Unity's disclosure controls and procedures were effective as of June 30, 2024, with no material changes in internal control - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2024[107] - No material change in internal control over financial reporting occurred during the quarter ended June 30, 2024[108] PART II—OTHER INFORMATION Item 1. Legal Proceedings Unity is vigorously defending a securities class action lawsuit and related derivative suits alleging false or misleading statements - Unity is defending against a securities class action complaint and related derivative suits alleging false or misleading statements about its product platform[110] - The securities class action alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, seeking unspecified damages[110] - All derivative actions (Movva, Duong, Wen, Flesner) are stayed pending the outcome of motions to dismiss in the Securities Class Action[110] Item 1A. Risk Factors Unity faces a range of risks including a history of losses, challenges in its strategic reset, intense competition, and geopolitical instability Risks Related to Our Business, Operations, and Industry Key business risks include a history of losses, execution of the portfolio reset, intense competition, and geopolitical instability in Israel - Unity has a history of GAAP losses and may not achieve or sustain profitability, with cost-cutting efforts potentially being ineffective or having adverse impacts[111][112] - Failure to successfully execute the portfolio reset to focus on the Strategic Portfolio (Unity Engine, Cloud, Monetization, AI) and right-size investments could harm the business[112] - The markets are highly competitive, and changes to pricing models (e.g., Q3 2023 Create Solutions changes) have resulted in negative customer feedback and impacted revenue[116] - Operating system platform providers or application stores may change terms, policies, or technical requirements, adversely impacting Unity or its customers[119] - Geopolitical instability, particularly in Israel where a significant portion of Grow Solutions operations is located, has impacted and may further adversely affect operations and employee productivity[129] - Global operations expose Unity to risks including slower adoption in certain regions (e.g., China), stringent privacy regulations, and currency exchange rate fluctuations[131] Risks Related to Our Platform and Technology Technology risks include platform performance issues, AI integration challenges, cybersecurity breaches, and the protection of intellectual property - Interruptions, performance problems, or defects in the platform can adversely affect business, financial condition, and results of operations, leading to customer loss or reputational damage[136][137] - Increasingly building AI into offerings (e.g., Unity Muse, Unity Sentis) introduces risks related to evolving regulations, litigation, ethical concerns, and market acceptance[137] - Security breaches or unauthorized access to data could harm reputation, disrupt operations, reduce demand, and incur significant liabilities, especially with increased geopolitical hostilities and AI vulnerabilities[138][139] - Dependence on the interoperability of solutions across third-party platforms and operating systems means failure to integrate timely can harm the business[141][142] - Failure to obtain, maintain, protect, or enforce intellectual property and proprietary rights could impair the ability to protect proprietary technology and brand[143][145] - Use of open source software in solutions could lead to litigation or unanticipated conditions/restrictions on commercialization[149] Risks Related to Our Management, Talent, and Brand Success depends on attracting and retaining talent amid significant management turnover and maintaining brand reputation after public scrutiny of business decisions - Attracting, managing, and retaining talent is critical, especially given recent significant management turnover (e.g., CEO, CFO changes) and intense competition for engineers and sales professionals[150][151] - Failure to maintain and enhance the brand, particularly after public scrutiny of business decisions like pricing model changes, could impair customer base expansion and harm financial results[152] Risks Related to Laws, Regulations, and the Global Economy Unity is subject to stringent global privacy laws, evolving AI regulations, and geopolitical risks, particularly related to US-China relations and tax law changes - Unity is subject to rapidly changing and stringent laws/regulations globally regarding privacy, data security, and children's protection (e.g., EU GDPR, UK GDPR, CCPA, AI/ML laws), requiring significant compliance resources and posing risks of litigation or penalties[153][154][155][157] - The business relies on targeted advertising, which is increasingly difficult due to platform changes (Apple's opt-out, Google's Android Privacy Sandbox, Chrome cookie phase-out) and new regulations[157][158] - Adverse changes in the geopolitical relationship between the U.S. and China, including trade restrictions and gaming industry regulations, could significantly affect business conditions and revenue growth plans[160] - Changes in tax laws (e.g., Pillar One/Two), tax liability, or limitations on using net operating losses (NOLs) could adversely affect results of operations and financial condition[163][164] - Legal proceedings, including securities class actions, can be costly, time-consuming, and harm reputation regardless of outcome[164] Risks Related to Our Convertible Notes The convertible notes pose risks including significant debt servicing requirements, potential stockholder dilution, and counterparty risk on capped call transactions - Servicing the $2.2 billion in convertible notes requires significant cash, and the ability to refinance or repurchase depends on future performance and capital markets[167] - Issuance of common stock upon conversion of notes may dilute stockholders and create downward pressure on the stock price[169] - The conditional conversion feature of the 2026 Notes and the conversion feature of the 2027 Notes may adversely affect liquidity if cash settlement is required[170] - Unity is subject to counterparty risk with respect to the Capped Call Transactions, which are unsecured[172] Risks Related to Ownership of Our Common Stock Ownership risks include high stock price volatility, potential depression of market price from future sales, and limited influence for new investors - The market price of common stock has been and may continue to be highly volatile, potentially declining due to various factors including financial performance and sales of shares[173][174] - Future sales of a substantial number of common stock shares could depress the market price[174] - The share repurchase program, intended to offset dilution, may not achieve its goal and is impacted by the 1% Share Repurchase Excise Tax[175] - Concentration of ownership among executive officers, directors, and principal stockholders may prevent new investors from influencing significant corporate decisions[175] - Unity does not intend to pay dividends for the foreseeable future, meaning investment return depends on stock price appreciation[176] - Anti-takeover provisions in charter documents and Delaware law could make an acquisition more difficult and limit stockholders' ability to replace management[177] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Unity Software Inc reported no unregistered sales of equity securities and no use of proceeds during the period - No unregistered sales of equity securities were reported[178] - No use of proceeds was reported[178] Item 3. Defaults Upon Senior Securities Unity Software Inc reported no defaults upon senior securities - No defaults upon senior securities were reported[179] Item 4. Mine Safety Disclosures This item is not applicable to Unity Software Inc - Mine Safety Disclosures are not applicable to Unity Software Inc[179] Item 5. Other Information This section discloses Rule 10b5-1 trading plans adopted by certain directors and officers during the three months ended June 30, 2024 Rule 10b5-1 Trading Plans | Name | Title | Action | Date Adopted | Expiration Date | Aggregate of Securities to be Purchased/Sold | | :---------------- | :-------------------------------- | :----- | :------------- | :-------------- | :--------------------------------------------- | | Carol Carpenter | Senior Vice President, Chief Marketing Officer | Adopted | May 24, 2024 | August 1, 2025 | 25,000 | | Marc Whitten | Chief Technology Officer, Create | Adopted | May 28, 2024 | December 31, 2024 | 264,570 | - Carol Carpenter resigned as SVP and Chief Marketing Officer effective June 30, 2024, transitioning to Strategic Marketing Advisor until December 1, 2024[181] - Marc Whitten resigned as Chief Product and Technology Officer, Create, effective June 1, 2024, and as Strategic Advisor on July 9, 2024[181] Item 6. Exhibits This section provides an index of exhibits filed with the report, including merger agreements, executive offer letters, and required certifications - The exhibit index includes the Agreement and Plan of Merger with ironSource, organizational documents, executive offer letters, and severance plans[183] - Section 302 and 906 Certifications of Principal Executive and Financial Officers are filed herewith[183] - Certifications under 18 U.S.C. Section 1350 are furnished, not deemed 'filed' for Section 18 of the Exchange Act, and are not incorporated by reference[185] SIGNATURES Signature of Authorized Signatory The report is duly signed on behalf of Unity Software Inc by its Chief Accounting Officer on August 8, 2024 - The report was signed by Mark Barrysmith, Chief Accounting Officer, on August 8, 2024[187]