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Unity (NYSE:U) Misses Q1 Sales Targets, Stock Drops 32.5%


Radek Strnad /
2022/05/10 4:12 pm EDT
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Game engine maker Unity (NYSE:U) missed analyst expectations in Q1 FY2022 quarter, with revenue up 36.3% year on year to $320.1 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $292.5 million at the midpoint, or 18.6% below analyst estimates. Unity made a GAAP loss of $177.5 million, down on its loss of $107.4 million, in the same quarter last year.

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Unity (U) Q1 FY2022 Highlights:

  • Revenue: $320.1 million vs analyst estimates of $321.1 million (small miss)
  • EPS (non-GAAP): -$0.08 vs analyst estimates of -$0.08 (small beat)
  • Revenue guidance for Q2 2022 is $292.5 million at the midpoint, below analyst estimates of $359.6 million
  • The company dropped revenue guidance for the full year, from $1.49 billion to $1.38 billion at the midpoint, a 7.19% decrease
  • Free cash flow of $86.3 million, up from negative free cash flow of $53.4 million in previous quarter
  • Net Revenue Retention Rate: 135%, down from 140% previous quarter
  • Customers: 1,083 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 70.6%, down from 74.9% same quarter last year

“Unity delivered record quarterly revenue in the first quarter of 2022, the highest in the company’s history, up 36% compared with the first quarter of 2021, with Create over-performing at 65% year-on-year growth, offset by slower growth in Operate,” said John Riccitiello, President and Chief Executive Officer, Unity.

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 or interactive movies.

Sales Growth

As you can see below, Unity's revenue growth has been impressive over the last year, growing from quarterly revenue of $234.7 million, to $320.1 million.

Unity Total Revenue

Despite missing analyst estimates of revenue, this was another quarter of strong revenue growth for Unity with revenue up 36.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $4.26 million in Q1, compared to $29.5 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Unity is expecting revenue to grow 6.92% year on year to $292.5 million, slowing down from the 48.4% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 34% over the next twelve months.

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Large Customers Growth

You can see below that at the end of the quarter Unity reported 1,083 enterprise customers paying more than $100,000 annually, an increase of 31 on last quarter. That is a bit less contract wins than last quarter and also quite a bit below what we have typically seen over the past couple of quarters, suggesting that the sales momentum with large customers is slowing down.

Unity customers paying more than $100,000 annually

Key Takeaways from Unity's Q1 Results

With a market capitalization of $14.9 billion, more than $1.8 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We enjoyed seeing Unity’s impressive revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Unity's revenue guidance for the full year missed analyst's expectations and the slowdown in customer growth. Overall, it seems to us that this was a complicated quarter for Unity. The company is down 32.5% on the results and currently trades at $32.41 per share.

Unity may have had a tough quarter, but does that actually create an opportunity to invest 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.

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