Unity (NYSE:U) Misses Q3 Sales Targets

Kayode Omotosho /
2022/11/09 4:10 pm EST

Game engine maker Unity (NYSE:U) missed analyst expectations in Q3 FY2022 quarter, with revenue up 12.7% year on year to $322.8 million. On the other hand, guidance for the next quarter exceeded analyst expectations with revenues guided to $435 million at the midpoint, or 11.8% above analyst estimates. Unity made a GAAP loss of $250 million, down on its loss of $115.1 million, in the same quarter last year.

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Unity (U) Q3 FY2022 Highlights:

  • Revenue: $322.8 million vs analyst estimates of $325.8 million (0.9% miss)
  • EPS (non-GAAP): $0.70 vs analyst estimates of -$0.15 ($0.85 beat)
  • Revenue guidance for Q4 2022 is $435 million at the midpoint, above analyst estimates of $389 million
  • Free cash flow was negative $80.7 million, compared to negative free cash flow of $58.2 million in previous quarter
  • Net Revenue Retention Rate: 111%, down from 121% previous quarter
  • Gross Margin (GAAP): 65.3%, down from 78.1% same quarter last year
  • Unity announced that it has completed the merger with ironSource

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 $200.7 million in Q3 FY2020, to $322.8 million.

Unity Total Revenue

This quarter, Unity's quarterly revenue was once again up 12.7% year on year. On top of that, revenue increased $25.8 million quarter on quarter, a strong improvement on the $23 million decrease in Q2 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Unity is expecting revenue to grow 37.7% year on year to $435 million, slowing down from the 43.3% 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 32.8% over the next twelve months.

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 1,075 enterprise customers paying more than $100,000 annually, a decrease of 10 on last quarter. We have no doubt shareholders would like to see the company regain its sales momentum.

Unity customers paying more than $100,000 annually

Key Takeaways from Unity's Q3 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 $7.13 billion and more than $1.68 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the very optimistic revenue guidance Unity provided for the next quarter. On the other hand, it was less good to see the deterioration in revenue retention rate and there was a slowdown in new contract wins. Overall, this quarter's results were mixed. The company is flat on the results and currently trades at $21.46 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.