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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-39497
UNITY SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware 27-0334803
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
30 3rd Street
San Francisco, California 94103‑3104
(Address, including zip code, of principal executive offices)
(415) 539‑3162
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, $0.000005 par value U The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer Accelerated filer
Nonaccelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes No x
As of August 2, 2022, there were 298,162,767 shares of the registrant’s common stock outstanding.



UNITY SOFTWARE INC.
FORM 10‑Q
For the Quarter Ended June 30, 2022
TABLE OF CONTENTS
Page
Item 1.
1
1
2
3
4
6
8
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.




NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10‑Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “toward,” “will,” “would,” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
our expectations regarding our financial performance, including revenue, cost of revenue, gross profit or gross margin, operating expenses, key metrics, and our ability to achieve or maintain future profitability;
our ability to effectively manage our growth;
anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;
our expectations regarding the demand for real-time 3D ("RT3D") content in gaming and other industries and our ability to increase revenue from these industries;
economic and industry trends;
our ability to increase sales of our solutions;
our ability to attract and retain customers;
our ability to expand our offerings and cross-sell to our existing customers;
our expectations regarding the plans implemented or announced by Apple and Google with respect to access of advertising identifiers and related matters, and the potential impact on our financial performance;
our ability to maintain and expand our relationships with strategic partners;
our ability to continue to grow across all major global markets;
the effects of increased competition in our markets and our ability to successfully compete with companies that are currently in, or may in the future enter, the markets in which we operate;
our estimated market opportunity;
our ability to timely and effectively scale and adapt our solutions;
our ability to continue to innovate and enhance our solutions;
our ability to develop new products, features, and use cases and bring them to market in a timely manner, and whether our customers and prospective customers will adopt these new products, features and use cases;
our ability to maintain, protect, and enhance our brand and intellectual property;
our ability to identify, complete, and integrate acquisitions that complement and expand the functionality of our platform, including the proposed merger with ironSource;
our plans with respect to our stock repurchase program;
our ability to comply or remain in compliance with laws and regulations that currently apply or become applicable to our business in the United States ("U.S.") and globally;



our reliance on key personnel and our ability to attract, maintain, and retain management and skilled personnel;
the effects of the COVID-19 pandemic or other public health crises; and
the future trading prices of our common stock.
We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10‑Q.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10‑Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. Readers are cautioned that these forward‑looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified below, under “Part II—Other Information, Item 1A. Risk Factors” and elsewhere herein. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10‑Q. The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10‑Q. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10‑Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10‑Q to reflect events or circumstances after the date of this Quarterly Report on Form 10‑Q or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
Additional Information
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to "we," "us," "our," "our company," "Unity," and "Unity Technologies" refer to Unity Software Inc. and its consolidated subsidiaries. The Unity design logos, "Unity" and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Unity Software Inc. or its affiliates. Other trade names, trademarks, and service marks used in this Quarterly Report on Form 10-Q are the property of their respective owners.
Investors and others should note that we may announce material business and financial information using our investor relations website (www.investors.unity.com), our filings with the Securities and Exchange Commission, press releases, public conference calls, and public webcasts as means of complying with our disclosure obligations under Regulation FD. We encourage investors and others interested in our company to review the information that we make available.



RISK FACTORS SUMMARY
Investing in our common stock involves numerous risks, including the risks described in "Part II—Other Information, Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q. Below are some of these risks, any one of which could materially adversely affect our business, financial condition, results of operations, and prospects.
We have a history of losses and may not achieve or sustain profitability in the future.
We have a limited history operating our business at its current scale, and as a result, our past results may not be indicative of future operating performance.
Our core value of putting our users first may cause us to forgo short-term gains and may not lead to the long-term benefits we expect.
Our business and operations have experienced recent rapid growth, which may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects.
If we are unable to retain our existing customers and expand their use of our platform, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
If we are unable to attract new customers, our business, financial condition and results of operations will be adversely affected.
We derive a significant portion of our revenue from our Operate Solutions. If we fail to attract and retain Operate Solutions customers, our business and results of operations would be adversely affected.
Operating system platform providers or application stores may change terms of service, policies or technical requirements to require us or our customers to change data collection and privacy practices, business models, operations, practices, advertising activities or application content, which could adversely impact our business.
If we are unable to further expand into new industries, or if our solutions for any new industry fail to achieve market acceptance, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our business relies in part on strategic relationships with hardware, operating system, device, game console and other technology providers. If we are unable to maintain favorable terms and conditions and business relations with respect to our strategic relationships, our business could be harmed.
If we do not make our platform, including new versions or technology advancements, easier to use or properly train customers on how to use our platform, our ability to broaden the appeal of our platform and solutions and to increase our revenue could suffer.
Interruptions, performance problems, or defects associated with our platform may adversely affect our business, financial condition, and results of operations.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition, and results of operations could be harmed.
If we or our third-party service providers experience a security breach or unauthorized parties otherwise obtain access to our customers’ data, our data, or our platform, our platform may be perceived as not secure, our reputation may be harmed, our business operations may be disrupted, demand for our products may be reduced, and we may incur significant liabilities.



If we fail to timely release updates and new features to our platform and adapt and respond effectively to rapidly changing technology, evolving industry standards, changing regulations, or changing customer needs, requirements, or preferences, our platform may become less competitive.
We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition, and results of operations could be harmed.
We rely on the performance of highly skilled personnel, including our management and other key employees, and the loss of one or more of such personnel, or of a significant number of our employees, or the inability to attract and retain executives and employees we need to support our operations and growth, could harm our business.
Our business depends on the interoperability of our solutions across third-party platforms, operating systems, and applications, and on our ability to ensure our platform and solutions operate effectively on those platforms. If we are not able to integrate our solutions with third-party platforms in a timely manner, our business may be harmed.
We are dependent on the success of our customers in the gaming market. Adverse events relating to our customers or their games could have a negative impact on our business.
We rely upon third-party data centers and providers of cloud-based infrastructure to host our platform. Any disruption in the operations of these third-party providers, limitations on capacity or interference with our use could adversely affect our business, financial condition, and results of operations.
Our results of operations have fluctuated in the past and are expected to fluctuate in the future, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price, and the value of your investment could decline.
Seasonality may cause fluctuations in our sales and results of operations.
Downturns or upturns in our sales may not be immediately reflected in our financial position and results of operations.
Third parties with whom we do business may be unable to honor their obligations to us or their actions may put us at risk.
We use resellers and other third parties to sell, market, and deploy our solutions to a variety of customers, and our failure to effectively develop, manage, and maintain our indirect sales channels would harm our business.
Our direct sales force targets larger customers, and sales to these customers involve risks that may not be present or that are present to a lesser extent with respect to sales to smaller customers.
If we fail to maintain and enhance our brand, our ability to expand our customer base will be impaired and our business, financial condition, and results of operations may suffer.
Our culture emphasizes innovation, and if we cannot maintain this culture as we grow, our business could be harmed.
We are subject to rapidly changing and increasingly stringent laws, contractual obligations, and industry standards relating to privacy, data security, and the protection of children. The restrictions and costs imposed by these requirements, or our actual or perceived failure to comply with them, could harm our business.
If we are unable to adequately address these and other risks we face, our business may be harmed.


Unity Software Inc.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
As of
June 30, 2022 December 31, 2021
Assets
Current assets:
Cash and cash equivalents $ 1,162,385  $ 1,055,776 
Marketable securities 591,475  681,323 
Accounts receivable, net 322,332  340,491 
Prepaid expenses and other 81,559  73,520 
Total current assets 2,157,751  2,151,110 
Property and equipment, net 112,489  106,106 
Goodwill 1,657,920  1,620,127 
Intangible assets, net 758,109  814,386 
Restricted cash 10,755  10,823 
Other assets 143,152  138,794 
Total assets $ 4,840,176  $ 4,841,346 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 11,633  $ 14,009 
Accrued expenses and other 214,217  233,976 
Publisher payables 197,631  237,637 
Deferred revenue 202,990  140,528 
Total current liabilities 626,471  626,150 
Convertible notes 1,705,268  1,703,035 
Long-term deferred revenue 131,519  15,945 
Other long-term liabilities 94,847  101,825 
Total liabilities 2,558,105  2,446,955 
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.000005 par value:
Authorized shares - 1,000,000 and 1,000,000
Issued and outstanding shares - 298,028 and 292,592
Additional paid-in capital 4,005,333  3,729,874 
Accumulated other comprehensive loss (9,924) (3,858)
Accumulated deficit (1,713,340) (1,331,627)
Total stockholders’ equity 2,282,071  2,394,391 
Total liabilities and stockholders’ equity $ 4,840,176  $ 4,841,346 
See accompanying Notes to Condensed Consolidated Financial Statements.


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Revenue $ 297,043  $ 273,562  $ 617,169  $ 508,334 
Cost of revenue 96,836  57,725  190,669  116,459 
Gross profit 200,207  215,837  426,500  391,875 
Operating expenses
Research and development 215,960  154,216  437,000  308,231 
Sales and marketing 100,908  74,888  204,847  144,681 
General and administrative 81,005  135,917  153,480  199,049 
Total operating expenses 397,873  365,021  795,327  651,961 
Loss from operations (197,666) (149,184) (368,827) (260,086)
Interest expense (1,123) (485) (2,234) (600)
Interest income and other expense, net (3,058) 70  (2,117) 1,635 
Loss before income taxes (201,847) (149,599) (373,178) (259,051)
Provision for (benefit from) Income taxes 2,311  (1,257) 8,535  (3,249)
Net loss (204,158) (148,342) (381,713) (255,802)
Basic and diluted net loss per share $ (0.69) $ (0.53) $ (1.29) $ (0.92)
Weighted-average shares used in computation of basic and diluted net loss per share 296,849  280,374  295,602  278,233 
See accompanying Notes to Condensed Consolidated Financial Statements.
2


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net loss $ (204,158) $ (148,342) $ (381,713) $ (255,802)
Other comprehensive loss, net of taxes:
Change in foreign currency translation adjustment (366) 81  (347) 50 
Change in unrealized losses on marketable securities (1,291) (3) (5,719) (106)
Other comprehensive income (loss) (1,657) 78  (6,066) (56)
Comprehensive loss $ (205,815) $ (148,264) $ (387,779) $ (255,858)
See accompanying Notes to Condensed Consolidated Financial Statements.
3


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Three Months Ended June 30, 2022
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Accumulated Stockholders’
Shares Amount Capital Loss Deficit Equity
Balance at March 31, 2022 295,846,751  $ $ 3,879,589  $ (8,267) $ (1,509,182) $ 2,362,142 
Issuance of common stock from employee equity plans 1,086,699  —  7,502  —  —  7,502 
Issuance of common stock for settlement of RSUs 1,094,102  —  —  —  —  — 
Stock‑based compensation expense —  —  118,242  —  —  118,242 
Net loss —  —  —  —  (204,158) (204,158)
Other comprehensive loss —  —  —  (1,657) —  (1,657)
Balance at June 30, 2022 298,027,552  $ $ 4,005,333  $ (9,924) $ (1,713,340) $ 2,282,071 
Three Months Ended June 30, 2021
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Accumulated Stockholders’
Shares Amount Capital Loss Deficit Equity
Balance at March 31, 2021 279,170,161  $ $ 2,927,242  $ (3,552) $ (906,480) $ 2,017,212 
Issuance of common stock from employee equity plans 2,287,484  —  15,435  —  —  15,435 
Issuance of common stock for settlement of RSUs 719,399  —  —  —  —  — 
Stock‑based compensation expense —  —  85,400  —  —  85,400 
Net loss —  —  —  —  (148,342) (148,342)
Other comprehensive loss —  —  —  78  —  78 
Balance at June 30, 2021 282,177,044  $ $ 3,028,077  $ (3,474) $ (1,054,822) $ 1,969,783 
See accompanying Notes to Condensed Consolidated Financial Statements.
4


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—CONTINUED
(In thousands, except share data)
(Unaudited)
Six Months Ended June 30, 2022
Accumulated
Additional Other Total
Common Stock Paid‑In Comprehensive Accumulated Stockholders’
Shares Amount Capital Loss Deficit Equity
Balance at December 31, 2021 292,592,356  $ $ 3,729,874  $ (3,858) $ (1,331,627) $ 2,394,391 
Issuance of common stock from employee equity plans 3,246,743  —  37,718  —  —  37,718 
Issuance of common stock for settlement of RSUs 2,019,132  —  —  —  —  — 
Common stock issued in connection with acquisitions 169,321  —  16,072  —  —  16,072 
Stock‑based compensation expense —  —  221,669  —  —  221,669 
Net loss —  —  —  —  (381,713) (381,713)
Other comprehensive loss —  —  —  (6,066) —  (6,066)
Balance at June 30, 2022 298,027,552  $ $ 4,005,333  $ (9,924) $ (1,713,340) $ 2,282,071 
Six Months Ended June 30, 2021
Accumulated
Additional Other Total
Common Stock Paid-In Comprehensive Accumulated Stockholders’
Shares Amount Capital Loss Deficit Equity
Balance at December 31, 2020 273,537,218  $ $ 2,838,057  $ (3,418) $ (797,498) $ 2,037,143 
Cumulative effect of accounting change —  —  —  —  (1,522) (1,522)
Issuance of common stock from employee equity plans 6,831,982  —  38,059  —  —  38,059 
Issuance of common stock for settlement of RSUs 1,807,844  —  —  —  —  — 
Stock‑based compensation expense —  —  151,961  —  —  151,961 
Net loss —  —  —  —  (255,802) (255,802)
Other comprehensive loss —  —  —  (56) —  (56)
Balance at June 30, 2021 282,177,044  $ $ 3,028,077  $ (3,474) $ (1,054,822) $ 1,969,783 
See accompanying Notes to Condensed Consolidated Financial Statements.
5


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2022 2021
Operating activities
Net loss $ (381,713) $ (255,802)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 84,108  24,102 
Stock-based compensation expense 221,669  151,961 
Other 5,890  7,680 
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net 17,873  (67,549)
Prepaid expenses and other (8,025) (14,778)
Other assets 13,333  (7,753)
Accounts payable (582) (1,274)
Accrued expenses and other (16,468) 3,970 
Publisher payables (40,006) 39,099 
Other long-term liabilities (15,663) (3,455)
Deferred revenue 178,014  8,236 
Net cash provided by (used in) operating activities 58,430  (115,563)
Investing activities
Purchases of marketable securities (150,911) (290,808)
Proceeds from principal repayments on marketable securities 30,683  11,624 
Maturities of marketable securities 200,666  168,000 
Purchases of non-marketable investments (15,000) (4,600)
Sales of non-marketable investments 1,000  — 
Purchases of property and equipment (30,357) (18,551)
Business acquisitions, net of cash acquired, and other (25,647) (69,430)
Net cash provided by (used in) investing activities 10,434  (203,765)
Financing activities
Proceeds from issuance of common stock from employee equity plans 37,718  38,059 
Net cash provided by financing activities 37,718  38,059 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash (41) 89 
Increase (decrease) in cash, cash equivalents, and restricted cash 106,541  (281,180)
Cash and restricted cash, beginning of period 1,066,599  1,293,947 
Cash, cash equivalents, and restricted cash, end of period $ 1,173,140  $ 1,012,767 
Supplemental disclosure of cash flow information:
Cash paid for interest $ —  $ 110 
Cash paid for income taxes, net of refunds $ 5,891  $ 5,839 
Cash paid for operating leases $ 12,653  $ 15,532 
Supplemental disclosures of non‑cash investing and financing activities:
Accrued property and equipment $ 2,842  $ 4,743 
Assets acquired under operating lease $ 8,683  $ 18,999 
6


Unity Software Inc.
The below table provides a reconciliation of cash and restricted cash reported within the condensed consolidated balance sheets to the total of the same amounts shown on the condensed consolidated statements of cash flows (in thousands):
As of June 30,
2022 2021
Cash and cash equivalents $ 1,162,385  $ 1,001,944 
Restricted cash 10,755  10,823 
Total cash, cash equivalents, and restricted cash $ 1,173,140  $ 1,012,767 
See accompanying Notes to Condensed Consolidated Financial Statements.
7


Unity Software Inc.
UNITY SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Basis of Presentation and Consolidation
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. The condensed consolidated financial statements include the accounts of Unity Software Inc. and its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, all adjustments, which include normal recurring adjustments necessary for a fair presentation, have been included. The results of operations for the three and six months ended June 30, 2022 shown in this report are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or any other period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no material changes in our significant accounting policies as described in our consolidated financial statements for the year ended December 31, 2021.
In the second quarter of 2022, we further condensed our Consolidated Balance Sheet and Statements of Cash Flows. Prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no impact on the previously reported total assets, liabilities, stockholders' equity, or net loss.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to our financial position and results of operations.
2. Revenue
The following table presents our revenue disaggregated by source, which also have similar economic characteristics (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Create Solutions $ 120,876  $ 72,614  $ 237,289  $ 143,001 
Operate Solutions 158,500  182,916  342,519  329,493 
Strategic Partnerships and Other 17,667  18,032  37,361  35,840 
Total revenue $ 297,043  $ 273,562  $ 617,169  $ 508,334 
8


Unity Software Inc.
The following table presents our revenue disaggregated by geography, based on the invoice address of our customers (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
United States $ 69,768  $ 62,566  $ 143,714  $ 119,572 
Greater China (1)
42,286  41,891  86,130  78,440 
EMEA (2)
101,835  105,260  217,147  191,362 
APAC (3)
75,068  53,905  151,761  99,584 
Other Americas (4)
8,087  9,940  18,417  19,376 
Total revenue $ 297,043  $ 273,562  $ 617,169  $ 508,334 
(1)    Greater China includes China, Hong Kong, and Taiwan.
(2)    Europe, the Middle East, and Africa ("EMEA")
(3)    Asia-Pacific, excluding Greater China ("APAC")
(4)    Canada and Latin America ("Other Americas")
Accounts Receivable, Net
Accounts receivable are recorded at the original invoiced amount, net of allowances for uncollectible amounts. We estimate losses on uncollectible amounts based on expected losses, including our historical experience of actual losses. The estimated loss on uncollectible amounts recorded as a general and administrative expense on our condensed consolidated statement of operations. As of June 30, 2022 and December 31, 2021, the allowance for uncollectible amounts was $6.4 million and $5.4 million, respectively.
We record unbilled receivables within Accounts receivable, net, when revenue is earned in advance of customer billing schedules. Unbilled receivables totaled $27.6 million and $28.3 million as of June 30, 2022 and December 31, 2021, respectively.
Sales Commissions
Sales commissions are incremental costs to obtain customer contract. If the expected benefit is greater than one year, commissions are capitalized and amortized over the expected period of benefit, which is generally three years. Capitalized commissions, net of amortization, are included in prepaid expenses and other and other assets on our condensed consolidated balance sheets.
As of June 30, 2022, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $8.5 million and $6.5 million, respectively. As of December 31, 2021, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $7.9 million and $8.7 million, respectively.
Commissions costs are recorded in sales and marketing expenses. For the three months ended June 30, 2022 and 2021, we amortized $2.2 million and $1.3 million of capitalized commissions, respectively. For the six months ended June 30, 2022 and 2021, we amortized $4.5 million and $2.3 million of capitalized commissions, respectively.
Contract Liabilities and Remaining Performance Obligations
Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. Revenue recognized during the three and six months ended June 30, 2022 that was included in the deferred revenue balances at April 1, 2022 and January 1, 2022, was $78.1 million and $98.6 million. respectively.
9


Unity Software Inc.
Additionally, we have performance obligations associated with commitments in customer contracts to perform in the future that have not yet been recognized in our consolidated financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized were $607.1 million and relate primarily to Create Solutions subscriptions, Enterprise Support, and Strategic Partnerships. These commitments generally extend over the next 1 to 5 years and we expect to recognize approximately one-third of the balance as revenue over the next 12 months.
10


Unity Software Inc.
3. Financial Instruments
Cash equivalents and marketable securities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value.
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions used to measure assets and liabilities at fair value. These valuations require significant judgment.
The following table summarizes, by major security type, our restricted cash, cash equivalents, and marketable securities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
June 30, 2022 December 31, 2021
Amortized Cost Unrealized Gains Unrealized Losses Fair Value Fair Value
Level 1:
Restricted cash:
Restricted cash $ 10,755  $ —  $ —  $ 10,755  $ 10,823 
Total restricted cash $ 10,755  $ —  $ —  $ 10,755  $ 10,823 
Level 1 securities:
Cash equivalents:
Money market funds $ 166,174  $ —  $ —  $ 166,174  $ 73,138 
Total cash equivalents $ 166,174  $ —  $ —  $ 166,174  $ 73,138 
Level 2 securities:
Marketable securities:
Commercial paper $ 127,113  $ —  $ —  $ 127,113  $ 59,792 
Asset-backed securities 28,317  —  (90) 28,227  40,942 
Corporate bonds 208,362  —  (3,465) 204,897  237,402 
U.S. treasury securities 181,344  —  (2,164) 179,180  272,300 
Supranational bonds 53,027  —  (969) 52,058  70,887 
Total marketable securities $ 598,163  $ —  $ (6,688) $ 591,475  $ 681,323 
We do not intend to sell any of the securities in an unrealized loss position and we expect to realize the full value of all these investments, which may be upon maturity. We did not recognize any credit losses related to our available-for-sale debt securities during the three and six months ended June 30, 2022 and 2021.
11


Unity Software Inc.
The following table summarizes the amortized cost and fair value of our marketable securities as of June 30, 2022, by contractual years to maturity (in thousands):
Amortized Cost Fair Value
Due within one year $ 542,211  $ 537,242 
Due between one and two years 55,952  54,233 
Total $ 598,163  $ 591,475 
There were no material realized or unrealized gains or losses, either individually or in the aggregate, during the three and six months ended June 30, 2022 and 2021.
Nonrecurring Fair Value Measurements
We hold equity investments in certain unconsolidated entities without a readily determinable fair value. These strategic investments represent less than a 20% ownership interest in each of the entities, and we do not have significant influence over or control of the entities. We elected the practical expedient in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 321, Investments-Equity Securities, and measure these investments at cost less any impairment, adjusted for observable price changes, if any. As of June 30, 2022, the equity investments totaled $15.6 million.
12


Unity Software Inc.
4. Acquisitions
Completed acquisition
MindKick, Inc.
On January 28, 2022, we completed the purchase of MindKick, Inc. ("MindKick") for a total purchase consideration of approximately $46.6 million. This amount was payable in a combination of approximately $26.7 million in cash and the issuance of 169,321 shares of common stock valued at approximately $16.1 million. An additional 42,330 shares of common stock subject to a service-based vesting condition were granted to certain employees of Mindkick; these shares of common stock are accounted for outside of the business combination and will be recognized as post-combination expense. MindKick provides 2D game creation tools and game templates with the goal of providing consumers the ability to create, play, and share their own 2D games on mobile. Prior to the completion of the acquisition, we held a minority investment in MindKick that we accounted for using the equity method of accounting. In circumstances where a business combination is achieved in stages, previously-held equity interests are remeasured at fair value. The remeasured fair value assigned to the previously-held equity interest in MindKick approximates cost, and therefore, no gain or loss was recognized.
The following table summarizes the consideration paid for MindKick and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
Consideration:
Cash $ 26,740 
Common stock issued 16,072 
Fair value of previously held interest 3,747 
Fair value of total consideration transferred $ 46,559 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Cash $ 2,789 
Intangible assets 7,450 
Deferred tax liability (685)
Other assets and liabilities, net (14)
Total identifiable net assets assumed 9,540 
Goodwill (1)
37,019 
Total $ 46,559 
(1)    Goodwill reflects the expected future benefits of certain synergies and acquired assembled workforce, which does not qualify for separate recognition as an identifiable intangible asset. The goodwill balance is not subject to amortization, and it is not deductible for U.S. income tax purposes
The transaction costs associated with the acquisition are not material.
The revenue and earnings of the acquired business have been included in our results since the acquisition date and are not material to our consolidated results.
13


Unity Software Inc.
Pending acquisition
On July 13, 2022, we entered into an Agreement and Plan of Merger to acquire ironSource Ltd ("ironSource"), a leading business platform for the app economy. The estimated purchase consideration is based on an exchange ratio of 0.1089 shares of Unity in exchange for shares of ironSource. As of August 8, 2022, this exchange ratio would translate to a purchase price of approximately $5.8 billion payable in common stock. The actual purchase consideration will change based on fluctuations in the share price of our common stock and the number of shares of ironSource outstanding on the closing date. The transaction, which is anticipated to close in the fourth quarter of this year, is subject to approval by ironSource and Unity stockholders, the receipt of required regulatory approvals, and other customary closing conditions. Additionally, we entered into an investment agreement with certain investors relating to the sale and issuance of $1.0 billion in aggregate principal amount of convertible senior notes due in 2027 (the "Notes"). The closing of the issuance and sale of the Notes is contingent upon closing of the acquisition of ironSource. The proceeds from the issuance and sale of the Notes are expected to be used to partially fund a plan to repurchase of up to $2.5 billion of shares of Unity Common Stock in open market transactions following the acquisition of ironSource.
5. Leases
We have operating leases for offices, which have remaining lease terms of up to 9.5 years, some of which include options to extend the lease with renewal terms from one year to five years. Some leases include an option to terminate the lease for up to five years from the lease commencement date.
Components of lease expense were as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Operating lease expense $ 8,163  $ 7,407  $ 15,783  $ 14,708 
Variable lease expense 1,393  1,471  2,838  2,446 
Sublease income —  (93) —  (186)
Total lease expense $ 9,556  $ 8,785  $ 18,621  $ 16,968 
Supplemental balance sheet information related to leases was as follows (in thousands, except weighted-average figures):
As of
Classification June 30, 2022 December 31, 2021
Operating lease assets Other assets $ 92,621  $ 98,393 
Current operating lease liabilities Accrued expenses and other $ 24,358  $ 23,729 
Long-term operating lease liabilities Other long-term liabilities 86,636  92,539 
Total operating lease liabilities $ 110,994  $ 116,268 
As of June 30, 2022, our operating leases had a weighted-average remaining lease term of 5.7 years and a weighted-average discount rate of 4.3%.
14


Unity Software Inc.
As of June 30, 2022, future minimum lease payments under our non-cancellable operating leases were as follows (in thousands):
Operating Leases (1)
Remainder of 2022 $ 14,931 
2023 26,849 
2024 23,075 
2025 17,619 
2026 11,371 
Thereafter 31,588 
Total future minimum lease payments 125,433 
Less: imputed interest (14,439)
Present value of lease liabilities $ 110,994 
(1)    Excludes future minimum payments for leases which have not yet commenced as of June 30, 2022.
As of June 30, 2022, we had entered into leases that have not yet commenced with future minimum lease payments of $49.5 million that are not yet reflected on our condensed consolidated balance sheet. These operating leases will commence in 2022 and 2023 with lease terms of 3.0 years to 10.7 years.
6. Borrowings
Convertible Notes
In November 2021, we issued an aggregate of $1.7 billion principal amount of 0% Convertible Senior Notes due 2026 (the "2026 Notes"), including the exercise in full by the initial purchasers of their option to purchase up to an additional $225.0 million aggregate principal amount of the 2026 Notes, pursuant to an Indenture dated as of November 19, 2021 (the "Indenture"), between us and U.S. Bank National Association, as trustee. Proceeds from the issuance of the 2026 Notes were $1.7 billion, net of debt issuance costs and cash used to purchase the capped call transactions ("Capped Call Transactions") discussed below. The debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method.
The 2026 Notes are general unsecured obligations which do not bear regular interest and for which the principal balance will not accrete. We may elect for special interest to accrue on the 2026 Notes as the sole remedy for any failure by us to comply with certain reporting requirements for the first 365 days after the occurrence of such failure under the Indenture. Holders of the 2026 Notes may receive special interest under specified circumstances as outlined in the Indenture. Special interest will accrue for any failure by us to comply with certain reporting requirements during the six-month period beginning on, and including, the date that is six months after the last date of original issuance of the 2026 Notes. Special interest will also accrue if, and for so long as: the restrictive legend on the 2026 Notes has not been removed, the 2026 Notes are assigned a restricted CUSIP number or the 2026 Notes are not otherwise freely tradeable by holders other than our affiliates as of the de-legending deadline date set forth in the Indenture, until the restrictive legend has been removed from the 2026 Notes, the 2026 Notes are assigned an unrestricted CUSIP number and the 2026 Notes are freely tradable. Special interest, if any, will be payable semiannually in arrears on November 15 and May 15 of each year, beginning on May 15, 2022 (if and to the extent that special interest is then payable on the 2026 Notes). The 2026 Notes will mature on November 15, 2026 unless earlier converted, redeemed, or repurchased.
The 2026 Notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election, at an initial conversion rate of 3.2392 shares of common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $308.72 per share of our common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the 2026 Notes.
15


Unity Software Inc.
We may not redeem the Notes prior to November 20, 2024. We may redeem for cash all or any portion of the 2026 Notes, at our option, on or after November 20, 2024 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30-consecutive-trading-day period (including the last day of such period), ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. On any such date, the redemption price shall equal 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid special interest, if any, up to, but excluding, the redemption date. If we redeem less than all the outstanding 2026 Notes, at least $150.0 million aggregate principal amount of 2026 Notes must be outstanding and not subject to redemption as of, and after giving effect to, delivery of the relevant notice of redemption. No sinking fund is provided for the convertible notes, which means that we are not required to redeem or retire them periodically.
Holders of the 2026 Notes may convert all or a portion of their 2026 Notes at their option at any time prior to the close of business on the business day immediately preceding August 15, 2026, in multiples of $1,000 principal amounts, only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on March 31, 2022 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the preceding calendar quarter, is greater than or equal to 130% of the applicable conversion price of the 2026 Notes on each such trading day;
during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of that ten consecutive trading day period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate of the 2026 Notes on each such trading day;
if we call such 2026 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the 2026 Notes called (or deemed called) for redemption; or
on the occurrence of specified corporate events set forth in the Indenture.
On or after August 15, 2026, the 2026 Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date, regardless of the foregoing circumstances.
In connection with a make-whole fundamental change, as defined in the Indenture, or in connection with certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, in each case as described in the Indenture, we will increase the conversion rate for a holder of the 2026 Notes who elects to convert its 2026 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Additionally, in the event of a fundamental change, subject to certain limitations described in the Indenture, holders of the 2026 Notes may require us to repurchase all or a portion of the 2026 Notes at a price equal to 100% of the principal amount of 2026 Notes to be repurchased, plus any accrued and unpaid special interest, if any, up to, but excluding, the fundamental change repurchase date.
We accounted for the issuance of the 2026 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
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Unity Software Inc.
As of
June 30, 2022
Convertible note:
Principal $ 1,725,000 
Unamortized debt issuance cost (19,732)
Net carrying amount $ 1,705,268 
Interest expense related to the amortization of debt issuance costs was $1.1 million and $2.2 million for the three and six months ended June 30, 2022, respectively.
As of June 30, 2022, the if-converted value of the 2026 Notes did not exceed the principal amount. The sale price for conversion was not satisfied and the 2026 Notes were not eligible for conversion as of June 30, 2022.
Capped Call Transactions
In connection with the pricing of the 2026 Notes, we entered into the Capped Call Transactions with certain counterparties at a net cost of $48.1 million with call options totaling approximately 5.6 million of our common shares, and expiration dates beginning on September 18, 2026 and ending on November 12, 2026. The strike price of the Capped Call Transactions is $308.72, and the cap price is initially $343.02 per share of our common stock and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are freestanding and are considered separately exercisable from the 2026 Notes.
The Capped Call Transactions are intended to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2026 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price described above. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital on our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification. As of June 30, 2022, the Capped Call Transactions were not in the money.
7. Commitments and Contingencies
The following table summarizes our non-cancelable contractual commitments as of June 30, 2022 (in thousands):
Total Remainder of 2022 2023‑2024 2025‑2026 Thereafter
Purchase commitments (1), (2)
$ 927,162  $ 77,786  $ 403,498  $ 416,453  $ 29,425 
(1)    The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.
(2)    In June 2022, we entered into a cloud service agreement for a term of 5 years with a total commitment of $300.0 million over the term. There was no spend during the three months ended June 30, 2022.
We expect to meet our remaining commitments.
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Table of Contents
Unity Software Inc.
Legal Matters
In the normal course of business, we are subject to various legal matters. We accrue a liability when management believes both that it is probable that a liability has been incurred and that the amount of loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in legal costs in the period in which they are realized. With respect to our outstanding matters, based on our current knowledge, we believe that the resolution of such matters will not, either individually or in aggregate, have a material adverse effect on our business or our consolidated financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters.
We are currently subject to two putative class action complaints, each of which we believe are without merit and intend to vigorously defend against.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third-party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. As of June 30, 2022, there were no known events or circumstances that have resulted in a material indemnification liability to us and we did not incur material costs to defend lawsuits or settle claims related to these indemnifications.
Letters of Credit
We had $10.8 million of secured letters of credit outstanding as of June 30, 2022 and December 31, 2021. These primarily relate to our office space leases and are fully collateralized by certificates of deposit which we record in restricted cash on our condensed consolidated balance sheets.
8. Stock‑Based Compensation
We recorded stock-based compensation expense related to grants to employees, including those in connection with modified awards, on our condensed consolidated statements of operations as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Cost of revenue $ 11,877  $ 5,340  $ 20,671  $ 10,457 
Research and development 60,110  33,227  115,363  64,877 
Sales and marketing 25,125  14,523  48,959  26,560 
General and administrative 21,130  32,310  36,676  50,067 
Total stock-based compensation expense $ 118,242  $ 85,400  $ 221,669  $ 151,961 
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Unity Software Inc.
Stock Options
A summary of our stock option activity under the 2009 Stock Plan, 2019 Stock Plan, and 2020 Equity Incentive Plan (the "2020 Plan") is as follows:
Options Outstanding
Stock
Options
Outstanding
Weighted-Average
Exercise
Price
Weighted-Average
Remaining
Contractual
Term
(In Years)
Balance as of December 31, 2021 29,226,041  $ 13.28  6.26
Granted 1,569,938  $ 74.59 
Exercised (3,038,757) $ 6.22 
Forfeited, cancelled, or expired (570,719) $ 34.77 
Balance as of June 30, 2022 27,186,503  $ 17.16  6.02
The calculated grant-date fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Expected dividend yield
Risk-free interest rate 3.0%
1.1% - 1.2%
1.7% - 3.0%
0.9% - 1.2%
Expected volatility 33.3%
36.1% - 36.2%
33.3% - 33.8%
36.0% - 36.2%
Expected term (in years) 6.25 6.25 6.25 6.25
Fair value of underlying common stock $38.47
$100.60 - $103.86
$38.47 - $89.01
$100.60 - $108.10
Restricted Stock Units
A summary of our RSU activity under the 2019 Stock Plan and 2020 Plan is as follows:
Unvested RSUs
Number of
Shares
Weighted-Average
Grant-Date
Fair Value
Unvested as of December 31, 2021 13,696,836  $ 85.96 
Granted 6,089,462  $ 66.22 
Vested (2,052,726) $ 83.49 
Forfeited (881,543) $ 84.69 
Unvested as of June 30, 2022 16,852,029  $ 79.20 
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Unity Software Inc.
Employee Stock Purchase Plan
In determining the fair value of the shares subject to our Employee Stock Purchase Plan (the "ESPP"), we use the Black-Scholes option pricing model that employs the following weighted-average assumptions:
Six Months Ended June 30,
2022
Expected dividend yield
Risk-free interest rate 0.6%
Expected volatility 40.0%
Expected term (in years) 0.50
Estimated fair value $27.42
Additional information related to the ESPP is provided below (in thousands, except per share amounts):
Six Months Ended June 30,
2022
Share issued under the ESPP 207,986
Weighted-average price per share issued $90.48
No shares were granted or issued under the ESPP during the three months ended June 30, 2022 or June 30, 2021.
9. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to volatility due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, and tax law developments.
Our effective tax rate for the three and six months ended June 30, 2022 differs from the U.S. federal statutory tax rate of 21% primarily due to the base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory R&D capitalization under the IRC Section 174, losses that cannot be benefited due to the valuation allowance on U.S., Denmark, and United Kingdom ("U.K.") entities, and to a lesser extent, foreign earnings taxed at different tax rates. Our effective tax rate for the three and six months ended June 30, 2021 differs from the U.S. federal statutory tax rate of 21% primarily due to foreign earnings taxed at different tax rates, credits and losses that cannot be benefited due to the valuation allowance on U.S. and Denmark entities, the tax benefit from stock-based compensation activities during the period, and the tax impact related to the U.K. corporate tax rate change, effective April 1, 2023, that was enacted during the three months ended June 30, 2021.
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. In performing this assessment with respect to each jurisdiction, we review all available positive and negative evidence. Primarily due to our history of losses, we believe that it is more likely than not that the deferred tax assets of our U.S. federal, certain state, Denmark, U.K., and certain non-U.S. jurisdictions will not be realized and as such, we have maintained a full valuation allowance against such deferred tax assets.
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Unity Software Inc.
As of June 30, 2022, we had $134.7 million of gross unrecognized tax benefits, of which $12.1 million would impact the effective tax rate, if recognized. It is reasonably possible that the amount of unrecognized tax benefits as of June 30, 2022 could increase or decrease significantly as the timing of the resolution, settlement, and closure of audits is highly uncertain. However, we believe that it is reasonably possible the amount of unrecognized tax benefits could decrease by $1.7 million in the next 12 months due to the lapse of statutes of limitation. We believe that we have adequately provided for any reasonably foreseeable outcome related to our tax audits and that any settlement will not have a material impact on our financial condition and operating results at this time.
10. Net Loss per Share of Common Stock
Basic and diluted net loss per share is the same for all periods presented because the effects of potentially dilutive items were antidilutive given our net loss in each period.
The following table presents potentially dilutive items excluded from the computation of diluted net loss per share for the following periods (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Convertible notes 17,438  —  12,441  — 
Stock options 27,187  34,275  27,187  34,275 
Unvested RSUs 16,852  11,943  16,852  11,943 
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Unity Software Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in "Part II—Other Information, Item 1A. Risk Factors" included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. See the section titled "Note Regarding Forward-Looking Statements" in this report.
Overview
Unity is the world’s leading platform for creating and operating interactive, RT3D content.
Our platform provides a comprehensive set of software solutions to create, run, and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.
Our platform consists of two distinct, but connected and synergistic, sets of solutions: Create Solutions and Operate Solutions.
Impact of Macroeconomic Trends and COVID-19
Recent negative macroeconomic factors could negatively impact our business, particularly our Operate Solutions. The relative strength of the U.S. dollar has impacted exchange rates which has also impacted our business.
In addition, the global impact of the COVID-19 pandemic continues to evolve, and we will continue to monitor the situation and the effects on our business and operations closely. We do not yet know the full extent of potential impacts on our business or operations or on the global economy as a whole, particularly as the COVID-19 pandemic persists. The return of more in-person activities will result in an increase in our expenses and could result in a range of impacts to our customers, which could impact our business. We are currently planning for most of our employees to return to in-person offices later in 2022, however our plans may change if the number of COVID-19 cases rises where our offices are located or if there is an increase in new variants.
The impact of these macroeconomic trends and the COVID-19 pandemic remains uncertain, and we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition. For additional details, refer to the section titled "Risk Factors."
Key Metrics
As further discussed in Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K, we monitor the following key metrics to help us evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.
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Unity Software Inc.
Customers Contributing More Than $100,000 of Revenue
We had 1,085 and 888 customers contributing more than $100,000 of revenue in the trailing 12 months as of June 30, 2022 and 2021, respectively. While we continue to demonstrate our ability to grow our revenues with existing customers, and our strong and growing penetration of larger enterprises, including AAA gaming studios and large organizations in industries beyond gaming, our rate of growth slowed down due to challenges observed in Operate Solutions. While these customers represented the substantial majority of revenue for the six months ended June 30, 2022 and 2021, respectively, no one customer accounted for more than 10% of our revenue for either period.
Dollar-Based Net Expansion Rate
Our ability to drive growth and generate incremental revenue depends, in part, on our ability to maintain and grow our relationships with our Create and Operate Solutions customers and to increase their use of our platform. We track our performance by measuring our dollar-based net expansion rate, which compares our Create and Operate Solutions revenue from the same set of customers across comparable periods, calculated on a trailing 12-month basis.
As of
June 30, 2022 June 30, 2021
Dollar-based net expansion rate 121  % 142  %
Our dollar-based net expansion rate as of June 30, 2022 and 2021, was driven primarily by the sales of additional subscriptions and services to our existing Create Solutions customers, expanded consumption among our existing Operate Solutions customers, and improvements in cross-selling our solutions to all of our customers. Dollar-based net expansion rate decreased, compared to the comparable prior year period, primarily due to the decline in Operate Solutions revenue.
The chart below illustrates that our dollar-based net expansion rate has been healthy, showing a strong relationship with existing customers despite a recent decline due to short-term headwinds and challenges in Operate Solutions.
unity-20220630_g1.jpg
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Unity Software Inc.
Results of Operations
The following table summarizes our historical consolidated statements of operations data for the periods indicated (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 297,043  $ 273,562  $ 617,169  $ 508,334 
Cost of revenue 96,836  57,725  190,669  116,459 
Gross profit 200,207  215,837  426,500  391,875 
Operating expenses
Research and development 215,960  154,216  437,000  308,231 
Sales and marketing 100,908  74,888  204,847  144,681 
General and administrative 81,005  135,917  153,480  199,049 
Total operating expenses 397,873  365,021  795,327  651,961 
Loss from operations (197,666) (149,184) (368,827) (260,086)
Interest expense (1,123) (485) (2,234) (600)
Interest income and other expense, net (3,058) 70  (2,117) 1,635 
Loss before for income taxes (201,847) (149,599) (373,178) (259,051)
Provision for (benefit from) income taxes 2,311  (1,257) 8,535  (3,249)
Net loss $ (204,158) $ (148,342) $ (381,713) $ (255,802)
The following table sets forth the components of our condensed consolidated statements of operations data as a percentage of revenue for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue 100  % 100  % 100  % 100  %
Cost of revenue 33  21  31  23 
Gross margin 67  79  69  77 
Operating expenses
Research and development 73  56  71  61 
Sales and marketing 34  27  33  28 
General and administrative 27  50  25  39 
Total operating expenses 134  133  129  128 
Loss from operations (67) (55) (60) (51)
Interest expense —  —  —  — 
Interest income and other expense, net (1) —  —  — 
Loss before income taxes (68) (55) (60) (51)
Provision for (benefit from) income taxes —  (1)
Net loss (69) % (55) % (61) % (50) %
Revenue
We derive revenue from Create Solutions, Operate Solutions, and Strategic Partnerships and Other.
Create Solutions
We generate Create Solutions revenue primarily through the sale of subscription arrangements for the use of our products and related support services.
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Unity Software Inc.
We offer subscription plans at various price points and recognize revenue over a service period that generally ranges from one to three years. We typically bill our customers on a monthly, quarterly or annual basis, depending on the size of the contract.
We generate additional Create Solutions revenue from the sale of professional services to our subscription customers. These services primarily consist of consulting, integration, training and custom application and workflow development, and may be billed in advance or on a time and materials basis. We generate Create revenue from a mix of customers both within and outside of gaming, with an increasing proportion generated from customers outside of gaming.
Operate Solutions
We generate Operate Solutions revenue through a combination of revenue-share and consumption-based business models that we manage as a portfolio of products and services.
Our monetization products are primarily based on a revenue-share model. These products were introduced in 2014 as our first set of Operate Solutions products and currently account for a majority of our Operate Solutions revenue. We recognize monetization revenue when an end user installs an application after seeing an advertisement (contracted on a cost-per-install basis), and when an advertisement starts (contracted on a cost-per-impression basis). Our revenue represents the amount we retain from the transaction we facilitate through our Unified Auction, a real-time bidding exchange that gives our customers access to Unity's network of over 60+ diverse demand sources. Actions by operating system platform providers or application stores such as Apple or Google may affect the manner in which we or our customers collect, use and share data from end-user devices. For example, Apple previously implemented a requirement for applications using its mobile operating system, iOS, to affirmatively (on an opt-in basis) obtain an end user’s permission to "track them across apps or websites owned by other companies" or access their device’s advertising identifier for advertising and advertising measurement purposes, as well as other restrictions. End-user opt-in rates due to these requirements have resulted in a limitation in our ability to help our customers monetize through personalized advertising. Additional modifications to the foregoing Apple requirements or changes to Apple's enforcement of its policies across the industry may result in further impacts to the efficacy of mobile personalized advertising. Google has also announced Privacy Sandbox for Android, which will introduce new advertising and attribution technologies that operate without advertising identifiers, including by creating isolated processes for third-party advertising code to run separately from an app’s code in order to limit advertisers' ability to collect app and user data. The long-term impact of these and other privacy and regulatory changes remains uncertain.
We also provide cloud-based services to support the ongoing operation of games and applications. These include application hosting services, as well as end-user engagement tools and voice chat services. These services are generally sold based on consumption and billed monthly in arrears. Some of our consumption-based contracts include a minimum fixed-fee consumption amount. We expect that our Operate Solutions beyond monetization, including cloud operations and hosting services, such as Multiplay, will grow as a percentage of our revenue as we further scale newer products and services for gaming customers as well as customers in other industries.
During the three months ended June 30, 2022, we focused our resources on addressing the data quality and accuracy challenges we observed with certain monetization tools in the first quarter of 2022. We started to see signs that our interventions have been effective during the quarter resulting in improvements in our performance in June. External factors, including the competitive landscape, and recent negative macroeconomic factors combined with complexity in accurately predicting the pace of the recovery, lead us to believe that the recovery will extend at least through the fourth quarter of 2022.
Strategic Partnerships and Other
We generate Strategic Partnerships revenue primarily from partnership contracts with hardware, operating system, device, game console, and other technology providers. Typically, we recognize revenue from these contracts as services are performed. In addition, certain partners pay us royalties based on the sales of applications sold on their platform that incorporate or use our customized software.
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Unity Software Inc.
We generate Other revenue primarily from our share of sales from our Asset Store, a marketplace and scaled aggregator for software, content, and tools used in the creation of real-time interactive games and applications, and from our Verified Solutions Partners, which sell software and tools certified for quality and compatibility with our platform.
Our total revenue is summarized as follows (in thousands, except percentages):
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Create Solutions $ 120,876  $ 72,614  $ 237,289  $ 143,001 
Operate Solutions 158,500  182,916  342,519  329,493 
Strategic Partnerships and Other 17,667  18,032  37,361  35,840 
Total revenue $ 297,043  $ 273,562  $ 617,169  $ 508,334 
The increase in total revenue in the three and six months ended June 30, 2022, compared to the comparable prior year periods, was primarily due to an increase in new customers as well as growth among existing customers within Create Solutions. Revenue from Operate Solutions declined in the three months ended June 30, 2022 and only grew to a small extent during the six months ended June 30, 2022 due to the challenges with our Operate Solutions products. We did see an increase in revenue per customer as customers increased their consumption across our Operate Solutions portfolio of products and services.
Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue consists primarily of hosting expenses, personnel costs (including salaries, benefits, and stock-based compensation) for employees associated with our product support and professional services organizations, allocated overhead (including facilities, information technology ("IT"), and security costs), third-party license fees, and credit card fees, as well as amortization of related capitalized software and depreciation of related property and equipment.
Gross profit, or revenue less cost of revenue, has been and will continue to be affected by various factors, including our product mix, the costs associated with third-party hosting services, and the extent to which we expand and drive efficiencies in our hosting costs, professional services, and customer support organizations. We expect our gross profit to increase in absolute dollars in the long term, but we expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.
Cost of revenue for the three and six months ended June 30, 2022 increased, compared to the comparable prior year periods, primarily due to higher personnel-related expenses associated with increased headcount, as well as an increase of $7.6 million and $15.2 million, respectively, in amortization expenses related to intangible assets acquired through our business acquisitions and an increase of $7.1 million and $14.2 million, respectively, related to professional service fees.
Gross profit for the three months ended June 30, 2022 decreased, compared to the comparable prior year period, primarily due the decline in Operate Solutions revenue and the aforementioned expense increases in cost of revenue. Gross profit for the six months ended June 30, 2022 increased, compared to the comparable prior year period, primarily due to an increase in revenue in our Create Solutions.
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Unity Software Inc.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. The most significant component of our operating expenses is personnel-related costs, including salaries and wages, sales commissions, bonuses, benefits, stock-based compensation, and payroll taxes. Although personnel-related costs contributed to the majority of the increase in expense period over period, we are observing a slow down in hiring.
Research and Development
Research and development expenses primarily consist of personnel-related costs for the design and development of our platform, third-party software services, professional services, and allocated overhead. We expense research and development expenses as they are incurred. We expect our research and development expenses to increase in absolute dollars and may fluctuate as a percentage of revenue from period to period as we expand our teams to develop new products, expand features and functionality with existing products, and enter new markets.
Research and development expense for the three and six months ended June 30, 2022 increased, compared to the comparable prior year periods, primarily due to higher personnel-related expenses as headcount increased to support continued product innovation, as well as an increase of $13.9 million and $30.2 million, respectively, in amortization expense related to intangible assets acquired through our business acquisitions.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs, advertising and marketing programs, including digital account-based marketing, user events such as developer-centric conferences and our annual Unite user conferences; and allocated overhead. We expect that our sales and marketing expense will increase in absolute dollars as we hire additional personnel, increase our account-based marketing, direct marketing and community outreach activities, invest in additional tools and technologies, and continue to build brand awareness. Our expenses may fluctuate as a percentage of revenue from period to period.
Sales and marketing expense for the three and six months ended June 30, 2022 increased, compared to the comparable prior year periods, primarily due to higher personnel-related expenses as headcount increased to support the growth of our sales and marketing teams, as well as an increase of $5.1 million and $10.4 million, respectively, in amortization expense related to intangible assets acquired through our business acquisitions. The increase in the three and six months ended June 30, 2022 was further driven, to a lesser extent, by increased travel and conference expenditures due to the softening of COVID-19 restrictions.
General and Administrative
Our general and administrative expenses primarily consist of personnel-related costs for finance, legal, human resources, IT, and administrative employees; professional fees for external legal, accounting, and other professional services; and allocated overhead. We expect that our general and administrative expenses will increase in absolute dollars and may fluctuate as a percentage of revenue from period to period as we scale to support the growth of our business.
General and administrative expense for the three and six months ended June 30, 2022 decreased, compared to the comparable prior year periods, primarily due to a one-time charge of $49.8 million for the termination of a future lease contract and the incremental equity award modification expense of $10.5 million associated with the separation of our former Chief Financial Officer recognized in the three months ended June 30, 2021. The decrease was partially offset primarily by higher personnel-related expenses as headcount increased, as well as an increase of $5.8 million in expenses associated with a legal entity reorganization in China and acquisition-related expenses.
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Unity Software Inc.
Interest Expense
Interest expense consists primarily of interest expense associated with our amortization of convertible debt issuance costs and Credit Agreement.
Interest expense for the three and six months ended June 30, 2022 increased, compared to the comparable prior year periods, due to our debt issuance costs amortization.
Interest Income and Other Expense, Net
Interest income and other expense, net, consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, amortization of premium arising at acquisition of marketable securities, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses. As we have expanded our global operations, our exposure to fluctuations in foreign currencies has increased, and we expect this to continue.
Interest income and other expense, net, for the three and six months ended June 30, 2022 decreased, compared to the comparable prior year periods, primarily due to foreign currency remeasurement losses.
Provision for (Benefit from) Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business. We have a valuation allowance against certain of our deferred tax assets, including net operating loss ("NOL") carryforwards and tax credits related primarily to research and development. Our overall effective income tax rate in future periods may be affected by the geographic mix of earnings in the countries in which we operate. Our future effective tax rate may also be affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles in the jurisdictions in which we conduct business. See Note 9, "Income Taxes," of the Notes to Condensed Consolidated Financial Statements.
Provision for income taxes for the three and six months ended June 30, 2022 increased, compared to the comparable prior year periods, primarily due to the tax expense recognized as a result of a base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory R&D capitalization under the IRC Section 174. Also, for the quarter ended June 30, 2021, a tax benefit from stock-based compensation activities in the U.K. was recognized, while for the period ended June 30, 2022 we maintained a valuation allowance against the deferred tax assets in the U.K. The quarter ended June 30, 2021 also included a tax benefit related to the U.K. corporate tax rate change, effective April 1, 2023, that was enacted during the three months ended June 30, 2021.
Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared and presented in accordance with GAAP we use certain non-GAAP performance financial measures, as described below, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe the following non-GAAP measures are useful in evaluating our operating performance. We are presenting these non-GAAP financial measures because we believe, when taken collectively, they may be helpful to investors because they provide consistency and comparability with past financial performance. In the future, we may also exclude non-recurring expenses and other expenses that do not reflect our overall operating results.
However, non-GAAP financial measures have limitations in their usefulness to investors because they have no standardized meaning prescribed by GAAP and are not prepared under any comprehensive set of accounting rules or principles. In addition, other companies, including companies in our industry, may calculate similarly-titled non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. As a result, our non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered in isolation or as a substitute for our consolidated financial statements presented in accordance with GAAP.
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Unity Software Inc.
Non-GAAP Gross Profit and Non-GAAP Loss from Operations
We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, and restructuring charges. We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, costs incurred from a legal entity reorganization in China, acquisition-related costs, restructuring charges, and a one-time expense for the termination of a future lease agreement.
We use non-GAAP gross profit and non-GAAP loss from operations in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that non-GAAP gross profit and non-GAAP loss from operations provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude expenses that we do not consider to be indicative of our overall operating performance.
Non-GAAP gross profit and non-GAAP loss from operations have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
they exclude expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;
non-GAAP gross profit and non-GAAP loss from operations excludes the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP gross profit and non-GAAP loss from operations does not reflect cash expenditure for such replacements;
non-GAAP loss from operations excludes costs incurred from a legal entity reorganization in China;
non-GAAP loss from operations excludes costs incurred from our acquisitions;
non-GAAP gross profit and non-GAAP loss from operations excludes costs incurred from restructuring activities that we initiated during the three months ended June 30, 2022;
non-GAAP loss from operations excludes the one-time expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future; and
the expenses and other items that we exclude in our calculation of non-GAAP gross profit and non-GAAP loss from operations may differ from the expenses and other items, if any, that other companies may exclude from this measure or similarly titled measures, which reduces their usefulness as comparative measures.
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Unity Software Inc.
The following table presents a reconciliation of our non-GAAP gross profit to our GAAP gross profit, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended
June 30,
2022 2021
GAAP gross profit $ 200,207 $ 215,837
Add:
Stock-based compensation expense 11,839 5,340
Employer tax related to employee stock transactions 205 511
Amortization of intangible assets expense 7,630
Restructuring charges 264
Non-GAAP gross profit $ 220,145 $ 221,688
GAAP gross margin 67  % 79  %
Non-GAAP gross margin 74  % 81  %
The year-over-year change in non-GAAP gross margin was primarily due to product mix of revenues and an increase of personnel-related costs to support Weta Digital.
The following table presents a reconciliation of our non-GAAP loss from operations to our GAAP loss from operations, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended
June 30,
2022 2021
GAAP loss from operations $ (197,666) $ (149,184)
Add:
Stock-based compensation expense 105,995  85,400 
Employer tax related to employee stock transactions 3,028  6,126 
Amortization of intangible assets expense 33,131  4,709 
Legal entity reorganization costs 2,315  — 
Acquisition-related costs 3,437  2,470 
Restructuring charges 5,635  — 
Lease termination expense —  49,795 
Non-GAAP loss from operations $ (44,125) $ (684)
The year-over-year change in our non-GAAP loss from operations was primarily due to the slower revenue growth, outpaced by our operating expenses, which were driven by an increase in headcount across the entire company to support investments in the business.
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Unity Software Inc.
Non-GAAP Net Loss and Non-GAAP Net Loss per Share
We define non-GAAP net loss and non-GAAP net loss per share as net loss and net loss per share excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, costs incurred from a legal entity reorganization in China, acquisition-related costs, restructuring charges, and a one-time expense for the termination of a future lease agreement as well as the related tax effects of these items. We use non-GAAP net loss and non-GAAP net loss per share in conjunction with traditional GAAP measures to evaluate our financial performance. We believe that these non-GAAP measures provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations.
Non-GAAP net loss and non-GAAP net loss per share have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
they exclude expense associated with our equity compensation plan, although equity compensation has been, and will continue to be, an important part of our compensation strategy;
they exclude the expense of amortization of acquired intangible assets, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and non-GAAP loss from operations does not reflect cash expenditure for such replacements;
they exclude the costs incurred from a legal entity reorganization in China;
they exclude the costs incurred from our acquisitions;
they exclude costs incurred from restructuring activities that we initiated during the three months ended June 30, 2022;
they exclude the one-time expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;
as further described below, we must make certain assumptions in order to determine the income tax effect adjustment for non-GAAP net loss, which assumptions may not prove to be accurate; and
the expenses and other items that we exclude in our calculation of non-GAAP net loss and non-GAAP net loss per share may differ from the expenses and other items, if any, that other companies may exclude from this measure or similarly titled measures, which reduces their usefulness as comparative measures.
Income Tax Effects of Non-GAAP Adjustments
We utilize a fixed annual projected tax rate in our computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this non-GAAP tax rate, we utilize a financial projection that excludes the direct impact of the non-GAAP adjustments described above, and eliminates the effects of non-recurring and period specific items which can vary in size and frequency. The projected rate considers other factors such as our current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where we operate. For the year ended December 31, 2021, the non-GAAP tax rate was (22)%. For the year ending December 31, 2022, we have determined the projected non-GAAP tax rate to be (10)%. We will periodically re-evaluate this tax rate, as necessary, for significant events, relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.
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Unity Software Inc.
The following table presents a reconciliation of our non-GAAP net loss and non-GAAP net loss per share to our GAAP net loss and GAAP net loss per share, respectively, which are the most directly comparable measures as determined in accordance with GAAP, for the periods presented (in thousands, except per share data):
Three Months Ended
June 30,
2022 2021
GAAP net loss $ (204,158) $ (148,342)
Add:
Stock-based compensation expense 105,995  85,400 
Employer tax related to employee stock transactions 3,028  6,126 
Amortization of intangible assets expense 33,131  4,709 
Legal entity reorganization costs 2,315  — 
Acquisition-related costs 3,437  2,470 
Restructuring charges 5,635  — 
Lease termination expense —  49,795 
Income tax effect of non-GAAP adjustments (2,520) (1,499)
Non-GAAP net loss $ (53,137) $ (1,341)
GAAP net loss per share attributable to our common stockholders, basic and diluted $ (0.69) $ (0.53)
Total impact on net loss per share, basic and diluted, from non-GAAP adjustments 0.51  0.52 
Non-GAAP net loss per share attributable to our common stockholders, basic and diluted $ (0.18) $ (0.01)
Weighted-average common shares used in GAAP net loss per share computation, basic and diluted 296,849  280,374 
Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted 296,849  280,374 
Free Cash Flow
We define free cash flow as net cash provided by (used in) operating activities less cash used for purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity as it measures our ability to generate cash, or our need to access additional sources of cash, to fund operations and investments.
Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
it is not a substitute for net cash provided by (used in) operating activities;
other companies may calculate free cash flow or similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison; and
the utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for any given period.
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Unity Software Inc.
The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Six Months Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ 58,430  $ (115,563)
Less:
Purchases of property and equipment (30,357) (18,551)
Free cash flow $ 28,073  $ (134,114)
Net cash provided by (used in) investing activities $ 10,434  $ (203,765)
Net cash provided by financing activities $ 37,718  $ 38,059 
The year-over-year change in free cash flow was primarily due to the receipt of four years of license fees of approximately $200.0 million from Weta FX, which was connected to the acquisition of certain assets from Weta Digital, partially offset by the payment in 2022 of the corporate bonus for the year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows.
Liquidity and Capital Resources
As of June 30, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.8 billion, which were primarily held for working capital purposes. Our cash equivalents and marketable securities are invested primarily in fixed income securities, including government and investment-grade debt securities and money market funds.
Our material cash requirements from known contractual and other obligations as of June 30, 2022 is as follows (in thousands):
Payments Due by Period
Total Remainder of 2022 2023 - 2024 2025-2026 Thereafter
Operating leases (1)
$ 125,433  $ 14,931  $ 49,924  $ 28,990  $ 31,588 
Purchase commitments (2)
927,162  77,786  403,498  416,453  29,425 
Convertible note (3)
1,725,000  —  —  1,725,000  — 
Total (4)
$ 2,777,595  $ 92,717  $ 453,422  $ 2,170,443  $ 61,013 
(1)    Operating lease obligations consist primarily of obligations for real estate.
(2)    The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.
(3)    Convertible note due 2026. See Note 6, "Borrowings," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
(4)    This table excludes amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities.
Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $1.7 billion as of June 30, 2022. We expect to continue to incur operating losses on a GAAP basis for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative. As a result, we may require additional capital to execute our strategic initiatives to grow our business.
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Unity Software Inc.
We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions. Our future capital requirements, however, will depend on many factors, including our growth rate; the timing and extent of spending to support our research and development efforts; capital expenditures to build out new facilities and purchase hardware and software; the expansion of sales and marketing activities; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary products, teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.
On July 13, 2022, we entered into an Agreement and Plan of Merger to acquire ironSource. If consummated, the merger with ironSource may have a significant impact on our liquidity, financial condition, and results of operations. In connection with the merger with ironSource, we entered into an investment agreement with Silver Lake Alpine II, L.P., and Silver Lake Partners VI, L.P. and Sequoia Capital Fund, L.P. (the "Investors") relating to the issuance and sale to the Investors of $1.0 billion in aggregate principal amount of our 2.0% Convertible Senior Notes due 2027 (the "2027 Notes"). The closing of the issuance and sale of the 2027 Notes (the "PIPE Closing") is expected to occur promptly following the closing of the merger with ironSource, subject to such closing and certain customary closing conditions. The proceeds from the issuance and sale of the 2027 Notes are expected to be used following the closing of the merger with ironSource to partially fund the repurchase of shares of our common stock pursuant to a 24-month, $2.5 billion stock repurchase program authorized by our Board of Directors effective upon the closing of the acquisition of ironSource. We may repurchase shares at our discretion in the open market, pursuant to accelerated repurchase agreements and/or in accordance with Rule 10b-18 under the Exchange Act and all other applicable federal and state securities laws and regulations and in accordance with Delaware General Corporation Law. The program may be modified, suspended or discontinued at any time. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, and market conditions.
Our changes in cash flows were as follows (in thousands):
Six Months Ended June 30,
2022 2021
Net cash provided by (used in) operating activities $ 58,430  $ (115,563)
Net cash provided by (used in) investing activities 10,434  (203,765)
Net cash provided by financing activities 37,718  38,059 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash (41) 89 
Net change in cash, cash equivalents, and restricted cash $ 106,541  $ (281,180)
Cash Provided by Operating Activities
During the six months ended June 30, 2022, net cash provided by operating activities was primarily due to the receipt of the prepayment of four years of license fees connected to the acquisition of certain assets from Weta Digital, partially offset by payment in 2022 of the corporate bonus for our fiscal year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows. Our cash flows fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments. Historical cash flows are not necessarily indicative of our results in any future period.
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Unity Software Inc.
Cash Used in Investing Activities
During the six months ended June 30, 2022, net cash provided by investing activities consisted of net cash provided by marketable securities offset by cash used in acquisitions, non-marketable investments, and capital expenditures.
Cash Provided by Financing Activities
During the six months ended June 30, 2022, net cash provided by financing activities consisted solely of proceeds from the issuance of common stock under our employee equity plans.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no material changes to our critical accounting policies and estimates from those disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our assessment of our exposures to market risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 22, 2022.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
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Unity Software Inc.
(b) Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Unity Software Inc.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
On July 6, 2022, a putative class action complaint, captioned Das v. Unity Software, Inc., et al., Case 3:22-cv-03962 (N.D. Cal.), was filed against the Company and its Chief Executive Officer, current Chief Financial Officer, and former Chief Financial Officer, in the U.S. District Court for the Northern District of California. The complaint, which asserts claims under Sections 10(b) and 20(a) of the Exchange Act, alleges that the Company and its executives made false or misleading statements and/or failed to disclose issues with the Company’s product platform and the likely impact of those issues on the Company’s fiscal 2022 guidance. The plaintiff seeks to represent a class of all persons and entities (other than the defendants) who acquired Unity securities between March 5, 2021 and May 10, 2022, and requests unspecified damages, pre- and post-judgment interest, and an award of attorneys' fees and costs. The Company believes this lawsuit is without merit and intends to vigorously defend the case.
On August 8, 2022, a putative class action complaint, captioned Assad v. Botha et al, Case No. 2022-0691, was filed in the Court of Chancery against the Company and its board of directors. The complaint alleges that the directors breached their fiduciary duties by failing to disclose all material information necessary to allow stockholders to make a fully informed decision on whether to approve the issuance of new shares as a part of the Company's preliminary Form S-4 filed in connection with the Company's proposed merger with ironSource Ltd.. The plaintiff is a purported stockholder and seeks to represent a class of stockholders who will vote in connection with the stock issuance. The complaint seeks additional disclosure and an award of attorneys’ fees, among other remedies. The Company believes this lawsuit is without merit and intends to vigorously defend the case.
In addition, from time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.
Item 1A. Risk Factors
Risks Related to Our Business, Operations, and Industry
We have a history of losses and may not achieve or sustain profitability in the future.
We have experienced significant net losses in each period since inception. While we have experienced significant revenue growth in recent periods, we have experienced a decline in our revenue growth rate and expect that this growth rate may continue to decline in future periods, and you should not rely on the revenue growth of any given prior period as an indication of our future performance. We are not certain whether we will be able to sustain or increase our revenue or whether or when we will attain sufficient revenue to achieve or maintain profitability in the future. We also expect our costs and expenses to increase in future periods, which could negatively affect our future results of operations if our revenue does not increase by amounts sufficient to offset such costs and expenses. In particular, we intend to continue to make significant investments to grow our business in such areas as:
research and development, including investments in our engineering teams and in further differentiating our platform and solutions with improvements to our Create and Operate Solutions, as well as the development of new products and features, including in consumer markets and live sports and entertainment;
our sales and marketing organizations to engage our existing and prospective customers, increase brand awareness and drive adoption and expansion of our platform and solutions;
research and development and sales and marketing initiatives to grow our presence in new industries and use cases beyond the gaming industry;
our technology infrastructure, including systems architecture, scalability, availability, performance, and security;
acquisitions or strategic investments;
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Unity Software Inc.
global expansion; and
our general and administration organization, including increased facilities expense as well as legal, IT, and accounting expenses associated with being a public company.
Our efforts to grow our business may be costlier than we expect and may not result in increased revenue. Even if such investments increase our revenue, any such increase may not be enough to offset our increased operating expenses. We may continue to incur significant losses in the future for a number of reasons, including the other risks described herein. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position and results of operations will be harmed, and we may not be able to achieve or maintain profitability, which could cause the value of our business and common stock to significantly decrease.
We have a limited history operating our business at its current scale, and as a result, our past results may not be indicative of future operating performance.
In recent years, we have significantly grown the scale of our business. For example, we launched the first of our Operate Solutions in 2014, we expanded into augmented and virtual reality platforms in 2016 and industries beyond gaming in 2018 and we have acquired more than 15 companies since the beginning of 2019. Accordingly, we have a limited history operating our business at its current scale and scope. You should not rely on our past results of operations as indicators of future performance. You should consider and evaluate our prospects in light of the risks and uncertainties frequently encountered by growing companies in rapidly evolving markets. These risks and uncertainties include challenges in accurate financial planning as a result of limited historical data relevant to the current scale and scope of our business and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories.
Our core value of putting our users first may cause us to forgo short-term gains and may not lead to the long-term benefits we expect.
One of our core values is that our users come first in everything we do, which we believe is essential to our success in increasing our growth and engagement and in serving the best, long-term interests of our company and our stockholders. Therefore, we may forgo certain expansion or short-term revenue or cost-saving opportunities that we do not believe will enhance the experience of our users, even if our decision negatively impacts our operating results. We cannot assure you that our decisions will lead to the long-term benefits that we expect, in which case our business and operating results could be harmed.
Our business and operations have experienced recent rapid growth, which may not be indicative of our future growth. Our rapid growth also makes it difficult to evaluate our future prospects.
You should not rely on our growth in any prior period as an indication of our future performance, as we may not be able to sustain our growth rate in the future. For example, in the second quarter of 2022, our growth rate declined below our expected long-term growth due to a variety of factors listed throughout the document which could happen again, including the maturation of our business. Overall growth of our revenue depends on our ability to execute on our growth strategies.
We may not successfully accomplish any of our objectives, and as a result, it is difficult for us to forecast our future results of operations. If the assumptions that we use to plan our business are incorrect or change in reaction to changes in our market, or if we are unable to maintain consistent revenue or revenue growth, our stock price could be volatile, and it may be difficult to achieve and maintain profitability. You should not rely on our results or growth for any prior quarterly or annual periods as any indication of our future results or growth.
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Unity Software Inc.
In addition, we expect to continue to expend substantial financial and other resources to grow our business, and we may fail to allocate our resources in a manner that results in increased revenue or other growth in our business. If we are unable to maintain or increase our revenue at a rate sufficient to offset the expected increase in our costs, our business, financial position, and results of operations will be harmed, and we may not be able to achieve or maintain profitability over the long term. Additionally, we may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If our growth does not meet our expectations in future periods, our business, financial position and results of operations may be harmed, and we may not achieve or maintain profitability in the future.
If we are unable to retain our existing customers and expand their use of our platform, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our future success depends on our ability to retain our existing customers and expand their use of our platform. An important component of our strategy is to broaden our relationships with existing customers. However, our customers have no obligation to renew their subscriptions for our Create Solutions, which are primarily one to three years in length, after they expire, and have no obligation to continue using our Operate Solutions, which are primarily sold under revenue-share or consumption-based models.
For us to maintain or improve our results of operations, it is important that our Create Solutions customers renew and expand their subscriptions with us and that our Operate Solutions customers continue using and expanding their use of our products. We invest in targeted sales and account-based marketing efforts to identify opportunities to grow use of our solutions within and across multiple studios within a single customer. However, our efforts may not be successful despite the resources we devote to them. Even if one or several studios within a customer adopts our Create or Operate Solutions, other studios within that customer may choose to adopt different solutions or to continue to employ internally-developed solutions.
It is also important for us to cross-sell more Create Solutions to our Operate Solutions customers, as well as Operate Solutions to our Create Solutions customers. While we believe there are significant cross-selling opportunities between our Create and Operate Solutions, and that our Create and Operate Solutions work together synergistically, we have only recently focused our sales efforts on targeting cross-selling opportunities, and we cannot be sure that our efforts will be successful.
Whether our customers renew or expand their subscriptions with us or continue using our platform depends on a number of factors, including the cost, performance and perceived value associated with our platform, their perception of our continued development of features important to them, the business strength or weakness of our customers, the success of our customers’ games and their ability to monetize, the effects of global economic conditions, the entry and success of competitive products and the other risk factors included in this Quarterly Report on Form 10‑Q.
If we do not retain our existing customers or if our existing customers do not expand their use of our platform and purchase additional products or services from us, our revenue may not increase or may decline and our business, financial condition and results of operations may be harmed.
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Unity Software Inc.
If we are unable to attract new customers, our business, financial condition and results of operations will be adversely affected.
Our ability to increase our revenue will depend in part on our success in attracting new customers. Our success will depend to a substantial extent on the widespread adoption of our platform as an alternative to existing platforms, including internally developed products developed by large gaming companies. As our market matures, our platform evolves and competitors introduce free, lower cost or differentiated products that compete with our platform, and our ability to market our platform and solutions could be impaired. Similarly, our sales efforts could be adversely impacted if customers and their end users perceive that features incorporated into competitive platforms or their own technologies reduce the relevance or attractiveness of our platform. Gaming companies that have invested significant development efforts in their own internally-generated technologies may be reluctant to replace their technologies with our platform unless they perceive our platform as offering significant incremental long-term benefits. Any decrease in user satisfaction with our platform or customer support would also harm our brand and word-of-mouth referrals, which in turn would hamper our ability to attract new customers.
As a result of these and other factors, we may be unable to attract new customers, which may have an adverse effect on our business, financial condition, and results of operations.
We derive a significant portion of our revenue from our Operate Solutions. If we fail to attract and retain Operate Solutions customers, our business and results of operations would be adversely affected.
We derive a significant portion of our revenue from our Operate Solutions. A majority of our Operate Solutions revenue is currently generated under a revenue-share model. The remainder of our Operate Solutions revenue is generated primarily as consumption-based revenue for various cloud-based products. We must continually add new features and functionality to our Operate Solutions to remain competitive and respond to our customers’ needs. If we are not successful in retaining and attracting new customers to our Operate Solutions, our business and results of operations would be adversely affected.
Revenue-share based consumption from our Operate products, including monetization products, currently accounts for a majority of our Operate Solutions revenue. Our customers depend on us as a source of their own revenue, which in some cases may represent a significant portion of their revenue. Should customers lose confidence in the value or effectiveness of our monetization products or if our Operate products are less effective, consumption of these products could decline. For example, our revenue growth in the first half of 2022 was negatively impacted by challenges with our Operate products (including a fault in our platform that resulted in reduced accuracy of one of our monetization tools, as well as the consequences of ingesting bad data from a large customer) that reduced the efficacy of such products. We focused our resources on addressing the data quality and accuracy challenges we observed with certain monetization tools in the first quarter of 2022. Recent negative macroeconomic factors combined with complexity in accurately predicting the pace of the recovery, lead us to believe that recovery will extend at least through the fourth quarter of 2022.
Additionally, revenue growth from our Operate products depends on our ability to continue to develop and offer effective features and functionality to help our customers drive value, which will require us to incur additional costs to implement. Developing and implementing these features will require us to incur additional costs.
In addition, our customers rely on us to attract a broad range of advertisers to our platform to generate demand for their impressions through our Unified Auction. If we are unable to also serve the needs of advertisers, they may reduce their consumption of our solutions and, because the advertising market is competitive, they may shift their business to other advertising solutions which could adversely affect our revenue. Our monetization products are also subject to factors and events beyond our control. For example, macroeconomic factors like labor shortages, supply chain disruptions, and inflation continue to cause logistical challenges, increased input costs, and inventory constraints for advertisers, and these factors are currently decreasing, and may in the future decrease or halt, advertiser spending.
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Unity Software Inc.
The consumption-based revenue for our Operate Solutions comes from our Unity Gaming Services, deltaDNA, Multiplay, and Vivox products. Our revenue from these products varies depending on the number of end users of these products or a customer’s hosting needs. A significant portion of the revenue generated from certain of these products in a given period can be driven by consumption by customers with large numbers of end users or high volume hosting requirements. If our customers experience a decline in the rate at which end users play their games, or if we are not able to replace customers who decrease or cease their consumption of our solution with new customers with similar consumption, our business may suffer.
Operating system platform providers or application stores may change terms of service, policies or technical requirements to require us or our customers to change data collection and privacy practices, business models, operations, practices, advertising activities or application content, which could adversely impact our business.
We and our customers are subject to the standard policies and terms of service of the operating system platforms on which we create, run and monetize applications and content, as well as policies and terms of service of the various application stores that make applications and content available to end users. These policies and terms of service govern the promotion, distribution, content, technical requirements, and operation generally of applications and content on such platforms and stores. Each of these platforms and stores has broad discretion to change and interpret its terms of service and policies with respect to us, our customers and other creators, and those changes may be unfavorable to us or our customers’ use of our platform. An operating system platform or application store may also change its fee structure, add fees associated with access to and use of its platform, alter how customers are able to advertise on their platform, change how the personal or other information of its users is made available to application developers on their platform, limit the use of personal information for advertising purposes or restrict how end users can share information on their platform or across other platforms.
In particular, operating system platform providers or application stores such as Apple or Google may change their technical requirements or policies in a manner that adversely impacts the way in which we or our customers offer solutions or collect, use, and share data from end-user devices. Restrictions on our ability to collect and use data as desired could negatively impact our Operate Solutions as well as our resource planning and feature development planning for our software. Actions by operating system platform providers or application stores such as Apple or Google may affect the manner in which we or our customers offer solutions or collect, use, and share data from end-user devices. For example, Apple has recently implemented a requirement for applications using its mobile operating system, iOS, to affirmatively (on an opt-in basis) obtain an end user’s permission to “track them across apps or websites owned by other companies” or access their device’s advertising identifier for advertising and advertising measurement purposes, as well as other restrictions. The long-term impact of these and other privacy and regulatory changes remains uncertain. In addition, if customers have applications removed from these third-party platforms because of a change in platform guidelines that impact our code or practices, we could be exposed to legal risk and lose customers. In addition, these platforms could change their business models and could, for example, increase application store fees to our customers, which could have an adverse impact on our business.
If we or our customers were to violate, or an operating system platform provider or application store believes that we or our customers have violated, its terms of service or policies, that operating system platform provider or application store could limit or discontinue our or our customers’ access to its platform or store. In some cases these requirements may not be clear and our interpretation of the requirements may not align with the interpretation of the operating system platform provider or application store, which could lead to inconsistent enforcement of these terms of service or policies against us or our customers, and could also result in the operating system platform provider or application store limiting or discontinuing access to its platform or store. An operating system platform provider or application store could also limit or discontinue our access to its platform or store if it establishes more favorable relationships with one or more of our competitors or it determines that it is in their business interests to do so. Any limitation on or discontinuation of our or our customers’ access to any third-party platform or application store could adversely affect our business, financial condition or results of operations.
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If we are unable to further expand into new industries, or if our solutions for any new industry fail to achieve market acceptance, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our growth strategy is based, in part, on expanding into new industries beyond gaming, including architecture, engineering, construction, automotive, transportation, manufacturing, film, television, professional artistry, and retail, and across use cases, including automobile and building design, online and augmented reality product configurators, autonomous driving simulation and augmented reality workplace safety training, among others. The market for interactive RT3D and 2D content in industries beyond gaming is in an early stage of development, and it is uncertain whether this market will develop as we expect, how rapidly it will develop and how much it will grow. In addition, we have limited experience in addressing these markets and the investments that we are continuing to make to expand further into these markets may be ineffective.
Our success in these markets will depend, to a substantial extent, on the widespread adoption of our platform as an alternative to existing solutions, such as traditional 2D and 3D modeling and rendering tools, or adoption by customers that are not currently using any software solutions. Market acceptance of our platform in industries beyond gaming may not grow as we expect as a result of a number of factors, including the cost, performance and perceived value associated with our platform, our ability to adapt to the differing sales and marketing requirements appropriate to most effectively address these markets and our ability to develop or maintain integrations with strategic partners. In addition, our ability to achieve widespread adoption of our platform in these markets may be affected by the entry and success of competitive products, including from larger competitors with greater resources that have historically addressed these markets with legacy products, and accordingly have more brand recognition in these markets. If our platform does not achieve widespread adoption in these other markets, our ability to grow our revenue may suffer.
In addition, the investments we make to grow our business by expanding into new industries will continue to increase our costs and operating expenses on an absolute basis. We expect to invest significant research and development resources to develop and expand the functionality of our Create and Operate Solutions to meet the needs of customers in these industries, and we will need to increase our sales and marketing, legal and compliance and other efforts as we seek to expand into new industries that require a different go-to-market strategy than the gaming industry. These investments will occur in advance of our realization of significant revenue from such industries, particularly given that customers in these industries are typically enterprise customers with long contracting cycles, which will make it difficult to determine if we are allocating our resources effectively and efficiently. If the revenue we derive from these investments is not sufficient to achieve a return on investment, our business and results of operations would suffer.
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Our business relies in part on strategic relationships with hardware, operating system, device, game console and other technology providers. If we are unable to maintain favorable terms and conditions and business relations with respect to our strategic relationships, our business could be harmed.
We rely in part on strategic partnerships and other strategic relationships with hardware, operating system, device, game console, and other technology providers in order to be able to offer our customers the ability to deploy their content on a variety of third-party platforms. If any of these third parties were to suspend, limit or cease their operations or otherwise terminate their relationships with us, our results of operations could be adversely affected. We have entered into separate agreements with each of our strategic partners. Our agreements with our strategic partners are non-exclusive and typically have multi-year terms. Our strategic partners could decide to stop working with us, ask to modify their agreement terms in a cost prohibitive manner when their agreement is up for renewal or enter into exclusive or more favorable relationships with our competitors. Any loss of a strategic partnership or other strategic relationship could negatively affect the attractiveness of our platform to customers. In addition, we may have disagreements or disputes with these parties that could negatively impact or threaten our relationship with them. We cannot assure you that we will be successful in sourcing additional strategic partnerships or relationships or in retaining or extending our existing relationships with the parties with whom we currently have relationships. If we are unable to source additional strategic relationships or the parties with whom we currently have strategic relationships were to terminate their relationship with us, our revenue could decline and our business could be adversely affected.
In addition, acquisitions by our competitors of parties with whom we have strategic relationships could result in a decrease in the number of our current and potential customers, as these parties may no longer facilitate the adoption of our solutions by potential customers. Further, some of the parties with whom we have strategic relationships compete or may compete with certain of our solutions and may elect to no longer integrate with our platform. If we fail to maintain relationships with such parties, fail to develop new strategic relationships in new markets or expand the number of strategic relationships in existing markets, our ability to compete in the marketplace or to grow our revenue could be impaired, and our results of operations may suffer. Even if we are successful in maintaining these relationships, we cannot assure you that these relationships will result in increased customer usage or adoption of our solutions or increased revenue.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition, and results of operations could be harmed.
The markets in which we operate are highly competitive. A significant number of companies have developed or are developing solutions that currently, or in the future may, compete with some or all of our offerings. As we look to market and sell our platform to potential customers with existing solutions, we must convince their internal stakeholders that our platform is superior and/or more cost-effective to their current solutions.
With respect to our Create Solutions, we primarily compete against proprietary game engines built in-house by large game studios, as well as Cocos2d-x (Chukong Technologies) and Unreal Engine (Epic Games), which offer game development tools primarily serving the PC games and mobile games sectors, and, in the case of Unreal Engine (Epic Games), industries beyond gaming. Outside of gaming, we also compete with other development platforms that offer 2D and 3D design products.
With respect to our Operate Solutions, we compete in a fragmented ecosystem composed of select divisions of large, well-established companies as well as privately held companies. The large companies in our ecosystem may play multiple roles given the breadth of their business. Examples of these large companies are Amazon, Facebook, Google, Microsoft, and Tencent. Most of these companies are also our partners and customers.
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With the introduction of new technologies and market entrants, we expect that the competitive environment will remain intense or become even more intense in the future. Some of our actual and potential competitors have been acquired by other larger enterprises and have made or may make acquisitions or may enter into partnerships or other strategic relationships that may provide more comprehensive offerings than they individually had offered or achieve greater economies of scale than us.
Our competitors vary in size and in the breadth and scope of the solutions offered. Some of our competitors and potential competitors have greater name recognition, longer operating histories, more established customer relationships, larger marketing budgets and greater financial and operational resources than we do. Further, other potential competitors not currently offering competing products or services may expand their offerings to compete with our platform or enter the market through acquisitions, partnerships or strategic relationships. In particular, as we seek to invest in the expansion of our Create Solutions and Operate Solutions in new industries outside of gaming, we may encounter competition from large companies that offer 2D and 3D design products in those industries that may seek to introduce new products or new functionality to existing products that compete with our solutions. Those competitors have greater brand recognition in those industries where they already have a presence. In addition, our current and potential competitors may have or establish cooperative relationships among themselves or with our customers or other third parties that may further enhance their resources and offerings in our addressable market. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, and customer requirements. An existing competitor or new entrant could introduce new technology that is perceived to be easier to use or otherwise favorable to ours, which could reduce demand for our platform.
In addition to platform and technology competition, we face pricing competition. Some of our competitors offer their solutions, such as their game engines, at a lower price or for free, which has resulted in, and may continue to result in, pricing pressures. In addition, with respect to our monetization solutions, some of our competitors offer more favorable payment terms to publishers. We cannot assure you that we will not be forced to engage in price-cutting or revenue limiting initiatives, change payment terms or increase our advertising and other expenses to attract and retain customers in response to competitive pressures.
For all of these reasons, we may not be able to compete successfully against our current or future competitors, which could result in the failure of our platform to continue to achieve or maintain market acceptance, which would harm our business, results of operations and financial condition.
We may not be able to successfully manage our growth, and if we are not able to grow efficiently, our business, financial condition, and results of operations could be harmed.
The growth and expansion of our business places a continuous significant strain on our management, operational and financial resources. As usage of our platform grows, we will need to devote additional resources to improving its capabilities, features and functionality. In addition, we will need to appropriately scale our internal business, IT, and financial, operating and administrative systems to serve our growing customer base, and continue to manage headcount, capital and operating and reporting processes in an efficient manner. Any failure of or delay in these efforts could result in impaired performance and reduced customer satisfaction, resulting in decreased sales to new customers or lower dollar-based net expansion rates, which would hurt our revenue growth and our reputation. Further, any failure in optimizing the costs associated with our third-party cloud services as we scale could negatively impact our gross margins. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We may also suffer inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.
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We are dependent on the success of our customers in the gaming market. Adverse events relating to our customers or their games could have a negative impact on our business.
Our gaming customers are not the end users of our solutions, but rather they use our platform and solutions to create and/or operate their games, which are ultimately sold or distributed to an end user. As a result, our success depends in part on the ability of our customers to market and sell games that are created or operated with our solutions. If our customers’ marketing efforts are unsuccessful or if our customers experience a decrease in demand for their games, sales of our Create Solutions and our Operate Solutions could be reduced. The gaming market is characterized by intense competition, rapid technological change, increased focus by regulators, and economic uncertainty and, as such, there is no guarantee that any of our customers’ games will gain any meaningful traction with end users. In addition, some of our newer products, like Multiplay and Vivox, are more reliant on certain customers. While our large and diverse customer portfolio has helped to reduce the fluctuations in our Operate Solutions revenue as a whole resulting from the success of customers’ games and the timing of game releases, we cannot assure you that the size and diversification of our customer portfolio will sufficiently mitigate this risk. If our customers fail to create or operate popular games using our platform, and we are not able to maintain a diversified portfolio of “winners and losers,” our results of operations may be adversely affected.
Our results of operations have fluctuated in the past and are expected to fluctuate in the future, making it difficult to project future results, and if we fail to meet the expectations of securities analysts or investors with respect to our results of operations, our stock price, and the value of your investment could decline.
Our results of operations have fluctuated in the past and are expected to fluctuate in the future due to a variety of factors, many of which are outside of our control. As a result, our past results may not be indicative of our future performance. In addition to the other risks described herein, factors that may affect our results of operations include the following:
fluctuations in demand for or pricing of our platform;
fluctuations in usage of our platform;
our ability to retain and expand the use of our platform by existing customers;
our ability to attract new customers and convert free creators to customers;
changes in mix of solutions purchased by our customers;
demand for our gaming customers’ products and their ability to monetize those products, which in turn can have a significant impact on our revenue-share and consumption-based solutions;
timing and amount of our investments to expand the capacity of our third-party cloud hosting providers;
seasonality, especially with respect to our Operate Solutions, which tend to generate higher revenue during periods of increased time spent on entertainment, such as holidays, though such seasonal impacts have been and may be reduced or changed as a result of the COVID-19 pandemic;
investments in new features and functionality of the solutions offered on our platform;
timing of customer purchases and usage of our platform;
timing of updates and new features on our platform;
fluctuations or delays in purchasing decisions in anticipation of new solutions or enhancements by us or our competitors;
changes in customers’ budgets and in the timing of their budget cycles and purchasing decisions;
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our ability to price our offerings effectively;
amount and timing of payment for operating expenses, particularly research and development and sales and marketing expenses, including commissions, many of which occur in advance of the anticipated benefits resulting from such expenses;
amount and timing of non-cash expenses, including stock-based compensation, amortization of acquired intangibles and acquisition-related expenses;
amount and timing of costs associated with recruiting, training and integrating new employees and retaining and motivating existing employees;
timing of acquisitions and costs associated with integrating acquired companies;
general economic, social and public health conditions, both domestically and globally, as well as conditions specifically affecting industries in which our customers operate;
impact of new accounting pronouncements or changes in accounting principles;
costs that we incur in order to comply with changing regulatory or legal requirements, especially with respect to privacy and security matters;
changes in tax laws or regulations that are adverse to us or our customers;
changes in the competitive dynamics of our market, including consolidation among competitors or customers; and
significant security breaches of, technical difficulties with or interruptions to the delivery and use of our platform.
Any of these and other factors, or the cumulative effect