Unity (NYSE:U) Exceeds Q4 Expectations But Stock Drops

Adam Hejl /
2023/02/22 4:40 pm EST
Add to Watchlist

Game engine maker Unity (NYSE:U) reported results ahead of analyst expectations in the Q4 FY2022 quarter, with revenue up 42.8% year on year to $451 million. However, guidance for the next quarter was less impressive, coming in at $475 million at the midpoint, being 9.49% below analyst estimates. Unity made a GAAP loss of $287.8 million, down on its loss of $161.7 million, in the same quarter last year.

Is now the time to buy Unity? Access our full analysis of the earnings results here, it's free.

Unity (U) Q4 FY2022 Highlights:

  • Revenue: $451 million vs analyst estimates of $438 million (2.95% beat)
  • EPS: -$0.82 vs analyst estimates of -$0.42 (-$0.40 miss)
  • Revenue guidance for Q1 2023 is $475 million at the midpoint, below analyst estimates of $524.8 million
  • Management's revenue guidance for upcoming financial year 2023 is $2.13 billion at the midpoint, missing analyst estimates by 1.92% and predicting 52.8% growth (vs 25.1% in FY2022)
  • Free cash flow was negative $63.9 million, compared to negative free cash flow of $80.8 million in previous quarter
  • Net Revenue Retention Rate: 116%, up from 111% previous quarter
  • Customers: 1,340 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 69%, down from 78.4% same quarter last year

Started as a game studio by three friends in a Copenhagen apartment, Unity (NYSE:U) is a software as a service platform that makes it easier to develop and monetize new games and other visual digital experiences.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Sales Growth

As you can see below, Unity's revenue growth has been very strong over the last two years, growing from quarterly revenue of $220.3 million in Q4 FY2020, to $451 million.

Unity Total Revenue

And unsurprisingly, this was another great quarter for Unity with revenue up 42.8% year on year, driven by the merge with ironSource. On top of that, revenue increased $128.1 million quarter on quarter, a very strong improvement on the $25.8 million increase in Q3 2022, and a sign of re-acceleration of growth.

Guidance for the next quarter indicates Unity is expecting revenue to grow 48.4% year on year to $475 million, improving on the 36.4% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $2.13 billion at the midpoint, growing 52.8% compared to 25.3% increase in FY2022.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Large Customers Growth

You can see below that at the end of the quarter Unity reported 1,340 enterprise customers paying more than $100,000 annually, an increase of 265 on last quarter. That is a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, drive by the merge with ironSource.

Unity customers paying more than $100,000 annually

Key Takeaways from Unity's Q4 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Unity’s balance sheet, but we note that with a market capitalization of $14.7 billion and more than $1.59 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

It was unfortunate to see that Unity's revenue guidance for the full year missed analysts' expectations and without the merge with ironSource, Unity would have actually reported decline in customers. Overall, we think this was a complicated quarter. The market was likely expecting more and the company is down 8.06% on the results and currently trades at $34.79 per share.

Should you invest in Unity right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.