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.
Insight
Unity is the world’s leading platform for creating and exploiting interactive RT3D content.
Our platform provides a complete set of software solutions to create, run and monetize real-time interactive 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. Our Create Solutions are used by content creators-developers, artists, designers, engineers, and architects-to create interactive, real-time 2D and 3D content. Content can be created once and deployed to more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality platforms, among others. Our Operate Solutions offer customers the ability to grow and engage their end-user base, as well as run and monetize their content with the goal of optimizing end-user acquisition and operational costs, while increasing the lifetime value of their end users. We launched our first game development engine in 2004, bringing together a set of tools, such as rendering, lighting, physics, sound, animation, and user interface, that were designed to address the challenges faced by most game developers. Prior to Unity, developers primarily created these tools individually and repetitively across different target platforms, which was an expensive and time-consuming process. Unity made game development easier and faster. In the three months endedMarch 31, 2022 , we built upon our history of innovation by achieving a number of milestones that secured our position as the leading platform for creating and operating interactive, RT3D content including those identified below. •Unity announces the release of Unity 2021 LTS. Unity 2021 LTS delivers powerful improvements to workflows, rendering capabilities, and platform support to help creators realize their creative ambitions. New enhancements prioritize quality, productivity, and performance for any platform, genre, or artistic style. The announcement was made atGame Developers Conference 2022 and represents more than a year of focused development across the entire Unity Editor and underlying foundational features. In 2021 LTS, Unity continued its commitment to putting quality first in order to make the creator experience working in Unity more stable, productive, and efficient than ever before. 25 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. •Unity releases Enemies cinematic demo. A brand-new cinematic teaser featuring major advances for photorealistic eyes, hair, skin, and more - all rendered in real-time and running in 4K resolution, Enemies was released at theGame Developers Conference 2022. Unity announced a plan to release a Digital Human tech package that contains all of the updates and enhancements made since the version shared for The Heretic, and noted that most of the improvements in Unity that originated from the production of Enemies, or were directly adopted in it, are already in Unity 2021.2 or will be shipping in 2022.1 or 2022.2. •Unity announces Gigaya playable sample game. At GDC 2022, Unity highlighted a glimpse of our upcoming puzzle-platformer sample game, Gigaya. Gigaya is still in active development, but when it's done, it will be a free downloadable project designed to help developers learn from its creation process. The sample game was created using an ecosystem of Unity tools and features and is built on long-term support. Throughout the project, you'll find real-world examples of how these systems work, not just as standalone features but operating in parallel to offer a high-quality development product for games. •Unity Operate Solutions announces Unity Gaming Services GA release. Unity Gaming Services products will officially graduate out of open beta this July. In October of last year, Unity Gaming Services (UGS) was announced as a suite of tools and services built to simplify every developer's ability to create, host, and manage their games. Unity has since launched nine products into open beta and more than 54,000 game developers signed up to test the service and UGS tools have been installed into over 6,000 unique game projects. •Unity Sports & Live Entertainment Announces New Partnership with Insomniac Events. With nearly 30 years of creating experiences, the Insomniac Events team has partnered with Unity to bring a brand new, persistent metaverse world to its fans community where they can gather and engage virtually for live music performances regardless of location. We believe this partnership will define a new standard of live entertainment by delivering the next evolution of the Insomniac experience in 2022. •Unity has been hired byThe Orlando Economic Partnership (The Orlando Partnership ).The Orlando Partnership , a public-private, not-for-profit economic and community development organization representing hundreds of the region's top private businesses, has hired Unity to create a digital twin of the entire region to be showcased on display at theOrlando Partnership's new headquarters in downtownOrlando, Florida later this year. The Digital Twin will help examine and is intended to potentially solve regional challenges for the 800-square mile area, including transportation, climate change and utility mapping.The Orlando Partnership also plans to use the platform to show open land and office space to company leaders considering expanding or locating in theOrlando region. •Unity Announces Unity For Humanity 2022 Grant Winners. The program was created to assist creators using 3D art/creations to make the world a better place. Grantees will be aided with funding, mentorship, and technical support. The winners' projects were selected based on vision, impact, inclusion, and viability. In addition, Unity partnered with entertainer Common to create the Imagine Grant, which was given to the project that best inspires audiences to imagine a better world.
We continue to invest in research and development and seek selective acquisitions and partnerships to enhance and expand our platform.
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Table of ContentsUnity Software Inc. Impact of COVID-19 While our total revenue, cash flows, and overall financial condition have not been adversely impacted to date, the COVID-19 pandemic has caused general business disruption worldwide beginning inJanuary 2020 . The full extent to which the COVID-19 pandemic, including any new strains or mutations such as the delta or omicron variants, will directly or indirectly impact our business, results of operations, and financial condition will depend on future developments that are highly uncertain and cannot be accurately predicted. Although we experienced a modest adverse impact on our sales of Create Solutions as well as our Strategic Partnerships early in the pandemic, our pipeline of customer opportunities for our Create Solutions and Strategic Partnerships were largely back to normal levels by the end of 2020 and we have not experienced COVID-19 related impacts on our Create Solutions since then. We did see an increase in demand for our portfolio of products and services within Operate Solutions following the implementation of shelter-in-place orders in 2020 to mitigate the outbreak of COVID-19, which resulted in higher levels of end-user engagement in Operate Solutions and an increase in revenue, along with a decrease in operating expense due to materially reduced travel and spending on events and facilities, both of which moderated over time. This increased demand for our Operate Solutions has moderated, particularly as vaccines are becoming widely available, and as shelter-in-place orders and other related measures and community practices evolve. As restrictions related to COVID-19 ease, we expect travel and spending on events and facilities to increase. In response to the COVID-19 pandemic, we are also requiring or have required substantially all of our employees to work remotely to minimize the risk of the virus to our employees and the communities in which we operate. 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 strains. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, and business partners. The global impact of the COVID-19 pandemic continues to rapidly 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. Given the uncertainty, 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 indicators
We monitor the following key metrics to help us assess the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.
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Clients contributing more than
We have a history of strong growth in our customer base. We focus on the number of customers that generated more than$100,000 of revenue in the trailing 12 months, as this segment of our customer base represents the majority of our revenue and revenue growth. We expect that trend to continue. We define a customer as an individual or entity that generated revenue during the measurement period. A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer, even though we may enter into commercial agreements with multiple parties within that organization. We had 1,083 and 837 of such customers in the trailing 12 months as ofMarch 31, 2022 and 2021, respectively, demonstrating our ability to grow our revenues with existing customers, and our strong and growing penetration of larger enterprises, includingAAA gaming studios and large organizations in industries beyond gaming. While these customers represented the substantial majority of revenue for the three months endedMarch 31, 2022 and 2021, respectively, no one customer accounted for more than 10% of our revenue for either period.
Net expansion rate in dollars
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.
Our dollar-based net expansion rate as of a period end is calculated as current
period revenue divided by prior period revenue. Prior period revenue is the
trailing 12-month revenue measured as of such prior period end and includes
revenue from all customers that contributed revenue during such trailing
12-month period. Current period revenue is the trailing 12-month revenue from
these same customers as of the current period end. Our dollar-based net
expansion rate includes the effect of any customer renewals, expansion,
contraction, and churn but excludes revenue from new customers in the current
period.
As of
March 31, 2022 March 31, 2021
Dollar-based net expansion rate 135 %
140%
Our dollar-based net expansion rate as ofMarch 31, 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. 28
-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. The chart below illustrates our strong relationship with existing customers by presenting our dollar-based net expansion rate as of the end of each of the past eight quarters. [[Image Removed: unity-20220331_g1.jpg]]
Operating results
The following table summarizes the historical data for our Consolidated Statements of Income for the periods indicated (in thousands):
Three Months Ended March 31,
2022 2021
Revenue $ 320,126 $ 234,772
Cost of revenue 93,833 58,734
Gross profit 226,293 176,038
Operating expenses
Research and development 221,040 154,015
Sales and marketing 103,939 69,793
General and administrative 72,475 63,132
Total operating expenses 397,454 286,940
Loss from operations (171,161) (110,902)
Interest expense (1,111) (115)
Interest income and other expense, net 941
1,565
Loss before provision for income taxes (171,331)
(109,452)
Provision for (benefit from) income taxes 6,224 (1,992) Net loss$ (177,555) $ (107,460) 29
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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 March 31,
2022 2021
Revenue 100 % 100 %
Cost of revenue 29 25
Gross margin 71 75
Operating expenses
Research and development 69 66
Sales and marketing 32 30
General and administrative 23 27
Total operating expenses 124 123
Loss from operations (53) (47)
Interest expense - -
Interest income and other expense, net -
1
Loss before provision for income taxes (53)
(46)
Provision for (benefit from) income taxes 2 (1) Net loss (55) % (45) % Revenue
We derive revenue from Creating Solutions, Operating Solutions, and Strategic and Other Partnerships.
Create Solutions
We generate revenue from Create Solutions primarily through the sale of subscription fee arrangements for the use of our products and related support services.
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. As a result of billing our customers in advance, we record deferred revenue, and a portion of the revenue we report in each period is attributable to the recognition of deferred revenue related to subscription and support agreements that we entered into during previous periods.
We generate additional revenue from Create Solutions through the sale of professional services to our subscriber clients. These services primarily consist of consulting, integration, training, and development of custom applications and workflows, and can be billed in advance or on a time and material basis.
Operating 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.
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-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. 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 substantial 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 are facilitating 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 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. If end-users do not opt-in to participate in such tracking as defined by Apple, our ability to monetize through advertising could suffer. 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, which we introduced in 2018, will grow as a percentage of our revenue in the long term as we further scale newer products and services and as we launch additional solutions for gaming customers as well as customers in other industries. During the three months endedMarch 31, 2022 , we experienced challenges with our Operate products that negatively affected revenue in February and March and that we expect to persist through the third quarter and have minimal impact in the fourth. These challenges with our Operate products, which included the consequences of ingesting bad data from a large customer, reduced the efficacy of such products. We see these challenges as temporary and not structural and expect them to impact our business by approximately$110.0 million in 2022, with no carry-over impacts in 2023.
Strategic and other partnerships
We generate Strategic Partnerships revenue primarily from partnership contracts with hardware, operating system, device, game console, and other technology providers. Typically, we recognize revenue from these contracts as services are performed. These partnerships are typically multi-year software development arrangements with payments that are either made in advance on a quarterly basis or milestone-based. In addition, certain partners pay us royalties based on the sales of applications sold on their platform that incorporate or use our customized software. We generate Other revenue primarily from our share of sales from ourAsset Store , a marketplace and scaled aggregator for software, content, and tools used in the creation of real-time interactive games and applications, and from ourVerified Solutions Partners , which sell software and tools certified for quality and compatibility with our platform. 31 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc. Our total revenue is summarized as follows (in thousands, except percentages): Three Months Ended March 31, Change 2022 2021 Amount % Create Solutions$ 116,413 $ 70,387 $ 46,026 65 % Operate Solutions 184,019 146,578 37,441 26 % Strategic Partnerships and Other 19,694 17,807 1,887 11 % Total revenue$ 320,126 $ 234,772 $ 85,354 36 % The increase in revenue in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was substantially due to revenue growth among existing customers. Create Solutions revenue growth was largely attributable to an increase in new customers, as well as expansion of existing customers. Within Operate Solutions, the substantial majority of our revenue growth was driven by an increase in revenue per customer as customers increased their consumption across our Operate portfolio of products and services, due in part to the higher levels of end-user engagement as a result of strong product and sales execution.
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, but
we expect our gross profit as a percentage of revenue, or gross margin, to
fluctuate from period to period.
Our cost of sales, gross profit and gross margin are summarized as follows (in thousands, except percentages):
Three Months Ended
March 31, Change
2022 2021 Amount %
Cost of revenue $ 93,833 $ 58,734 $ 35,099 60 %
Gross profit $ 226,293 $ 176,038 $ 50,255 29 %
Gross margin 71 % 75 % (4) %
Cost of revenue for the three months ended March 31, 2022 increased primarily
due to an increase of $14.7 million in personnel-related expense, including
higher stock-based compensation expense of $3.7 million as headcount increased
to support our Create Solutions and Strategic Partnerships. In addition,
amortization expense increased by $7.6 million related to intangible assets
acquired through our business acquisitions. IT hosting expense also increased by
$4.0 million to support growth in our Create and Operate Solutions.
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Table of ContentsUnity 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.
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 is summarized as follows (in thousands, except
percentages):
Three Months Ended
March 31, Change
2022 2021 Amount %
Research and development $ 221,040 $ 154,015 $ 67,025 44 %
Research and development expense for the three months ended March 31, 2022
increased primarily due to an increase of $44.3 million in personnel-related
expenses, including higher stock-based compensation expense of $23.6 million as
headcount increased to support continued product innovation. Amortization
expense also increased by $13.6 million related to intangible assets acquired
through our business acquisitions. In addition, IT hosting expense increased by
$3.7 million due to growing data and compute needs.
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 is summarized as follows (in thousands, except
percentages):
Three Months Ended
March 31, Change
2022 2021 Amount %
Sales and marketing $ 103,939 $ 69,793 $ 34,146 49 %
Sales and marketing expense for the three months ended March 31, 2022 increased
primarily due to an increase of $23.1 million in personnel-related expenses,
including higher stock-based compensation expense of $11.8 million as headcount
increased to support the growth of our sales and marketing teams. Amortization
expense also increased by $5.8 million related to intangible assets acquired
through our business acquisitions. In addition, travel and conference
expenditures increased by $4.6 million due to the softening of COVID-19
restrictions.
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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 is summarized as follows (in thousands,
except percentages):
Three Months Ended
March 31, Change
2022 2021 Amount %
General and administrative $ 72,475 $ 63,132 $ 9,343 15 %
General and administrative expenses for the three months ended
increased mainly due to an increase in
Interest charges
Interest expense consists primarily of interest expense associated with our amortization of convertible debt issuance costs and Credit Agreement for the three months endedMarch 31, 2022 and 2021, respectively. Interest expense is summarized as follows (in thousands, except percentages): Three Months Ended March 31, Change 2022 2021 Amount % Interest expense$ (1,111) $ (115) $ (996) 866 %
Interest expense for the three months ended
Interest income and other expenses, 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, is summarized as follows (in thousands,
except percentages):
Three Months Ended
March 31, Change
2022 2021 Amount %
Interest income and other expense, net $ 941 $ 1,565
Interest income and other charges, net, for the three months ended
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Provision for 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 13, "Income Taxes," of the Notes to Condensed Consolidated Financial
Statements.
Provision for income taxes is summarized as follows (in thousands, except
percentages):
Three Months Ended
March 31 , Change
2022 2021
Amount % Provision for (profit) income taxes
Provision for income taxes for the three months endedMarch 31, 2022 increased 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 IRC Section 174. Also, for the quarter endedMarch 31, 2021 , a tax benefit from stock-based compensation activities in theU.K. was recognized, while for period endedMarch 31, 2022 we maintained a valuation allowance against the deferred tax assets in theU.K. , thereby increasing tax expense in the current period.
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.
Non-GAAP gross profit and non-GAAP operating loss
We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense. 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, and costs incurred from a legal entity reorganization inChina . 35
-------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. 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 stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense, which we do not consider to be indicative of our overall operating performance.
Non-GAAP gross profit and non-GAAP operating loss have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analyzing our results as reported under the GAAPs. 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 operating loss excludes costs incurred as a result of the reorganization of a legal entity into
•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.
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
March 31,
2022 2021
GAAP gross profit $ 226,293 $ 176,038
Add:
Stock-based compensation expense 8,794 5,117
Employer tax related to employee stock transactions 1,388 2,761
Amortization of intangible assets expense 7,555 -
Non-GAAP gross profit $ 244,030 $ 183,916
GAAP gross margin 71 % 75 %
Non-GAAP gross margin 76 % 78 %
The year-over-year change in non-GAAP gross margin was primarily due to product
mix of revenues, which includes increase of personnel-related costs to support
Weta Digital .
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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
March 31,
2022 2021
GAAP loss from operations $ (171,161) $ (110,902)
Add:
Stock-based compensation expense 103,427
66,561
Employer tax related to employee share transactions 9,752 16,458 Amortization of intangible assets
32,702
4,459
Legal entity reorganization costs 2,330 - Non-GAAP loss from operations$ (22,950) $ (23,424) The year-over-year change in our non-GAAP loss from operations was relatively flat due to higher personnel-related costs, driven by an increase in headcount across the entire company to support the growth in the business, as well as an increase in IT hosting costs to support growth in our Operate Solutions and our growing data and compute needs. This was offset by strong revenue growth in Create Solutions.
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, and costs incurred from a legal entity reorganization inChina 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 analyzing 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 generated by a reorganization of the legal entity in
• as described in more detail below, we must make certain assumptions in order to determine the tax effect adjustment for non-GAAP net loss, which assumptions may not turn out 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.
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Table of Contents Unity Software Inc.
Tax implications 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 endedDecember 31, 2021 , the non-GAAP tax rate was (22)%. For the year endingDecember 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, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions. 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 March 31, 2022 2021 GAAP net loss$ (177,555) $ (107,460) Add: Stock-based compensation expense 103,427 66,561 Employer tax related to employee stock transactions 9,752 16,458 Amortization of intangible assets expense 32,702 4,459 Legal entity reorganization costs 2,330 - Income tax effect of non-GAAP adjustments 3,912 (7,337) Non-GAAP net loss$ (25,432)
GAAP net loss per share attributable to our common stockholders, basic and diluted
$ (0.60)
Total impact on net loss per share, basic and diluted, of non-GAAP adjustments
0.52 0.29
Non-GAAP net loss per share attributable to our common stockholders, basic and diluted
$ (0.08)
Weighted average common shares used in the calculation of net loss per share under GAAP, basic and diluted
294,341 276,068
Weighted average common shares used in the calculation of non-GAAP net loss per share, basic and diluted
294,341 276,068 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 analyzing our results as reported under GAAP. Some of these limitations are:
•it does not replace the net cash provided by (used in) operating activities;
38 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc. •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 usefulness of free cash flow is further limited because it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for a given period.
The following table is 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):
Three Months Ended March 31,
2022 2021
Net cash provided by (used in) operating activities $ 101,300 $ (88,882)
Less:
Purchase of property and equipment (14,929) (11,744)
Free cash flow $ 86,371 $ (100,626)
Net cash used in investing activities $ (35,460) $ (89,626)
Net cash provided by financing activities $
30,216
The year-over-year change in free cash flow was primarily due to the receipt of four years of license fees connected to the acquisition of certain assets fromWeta Digital , partially offset by the payment of the corporate bonus for the year endedDecember 31, 2021 , our net loss, prepayments of software licenses, and an increase in working capital as our business grows.
Cash and capital resources
From
Our significant cash requirements arising from contractual and other obligations known to
Payments due by period
Remainder of
Total 2022 2023 - 2024 2025-2026 Thereafter
Operating leases (1) $ 136,823 $ 24,118 $ 68,628 $ 11,746 $ 32,331
Purchase commitments (2) 656,988 81,637 279,745 295,606 -
Convertible note (3) 1,725,000 -
- 1,725,000 - Total (4)$ 2,518,811 $ 105,755 $ 348,373 $ 2,032,352 $ 32,331
(1) Obligations under operating leases mainly consist of obligations relating to real estate.
(2) The vast majority of our purchase commitments relate to agreements with our data center hosting providers.
(3) Convertible note due 2026. See Note 10, “Borrowings”, in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.
(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.
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Table of ContentsUnity Software Inc. Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of$1.5 billion as ofMarch 31, 2022 . We expect to continue to incur operating losses 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. 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.
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