Game engine maker Unity (NYSE:U) fell short of analyst expectations in Q2 FY2022 quarter, with revenue up 8.58% year on year to $297 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $325 million at the midpoint, or 6.13% below analyst estimates. Unity made a GAAP loss of $204.1 million, down on its loss of $148.3 million, in the same quarter last year.
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Unity (U) Q2 FY2022 Highlights:
- Revenue: $297 million vs analyst estimates of $299 million (0.67% miss)
- EPS (non-GAAP): $0.51 vs analyst estimates of -$0.21 ($0.72 beat)
- Revenue guidance for Q3 2022 is $325 million at the midpoint, below analyst estimates of $346.2 million
- The company dropped revenue guidance for the full year, from $1.38 billion to $1.32 billion at the midpoint, a 4.5% decrease
- Free cash flow was negative $58.2 million, down from positive free cash flow of $86.3 million in previous quarter
- Net Revenue Retention Rate: 121%, down from 135% previous quarter
- Customers: 1,085 customers paying more than $100,000 annually
- Gross Margin (GAAP): 67.4%, down from 78.8% same quarter last year
“The second quarter of 2022 was consistent with our guidance with strong performance in Create Solutions,” 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.
As you can see below, Unity's revenue growth has been very strong over the last year, growing from quarterly revenue of $273.5 million, to $297 million.
Unity's quarterly revenue was only up 8.58% year on year, which would likely disappoint many shareholders. But the revenue actually decreased by $23 million in Q2, compared to $4.26 million increase in Q1 2022. We'd like to see revenue increase each quarter, but a one-off fluctuation is usually not concerning and the management is guiding for growth to rebound in the next quarter.
Guidance for the next quarter indicates Unity is expecting revenue to grow 13.5% year on year to $325 million, slowing down from the 42.6% 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 28.5% 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 1,085 enterprise customers paying more than $100,000 annually, an increase of 2 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.
Key Takeaways from Unity's Q2 Results
With a market capitalization of $14.8 billion, more than $1.75 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 struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that Unity's revenue guidance for the full year missed analyst's expectations and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results were not the best we've seen from Unity. The company is down 2.23% on the results and currently trades at $48.98 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.