Unity (NYSE:U) Q3 Sales Beat Estimates But Stock Drops

Adam Hejl /
2021/11/09 4:15 pm EST
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Game engine maker Unity (NYSE:U) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 42.6% year on year to $286.3 million. The company expects that next quarter's revenue would be around $287.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Unity made a GAAP loss of $115.1 million, improving on its loss of $144.7 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) Q3 FY2021 Highlights:

  • Revenue: $286.3 million vs analyst estimates of $266.3 million (7.49% beat)
  • EPS (non-GAAP): $0.35 vs analyst estimates of -$0.07 ($0.42 beat)
  • Revenue guidance for Q4 2021 is $287.5 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $34.2 million, up from negative free cash flow of $33.49 million in previous quarter
  • Net Revenue Retention Rate: 142%, in line with previous quarter
  • Customers: 973 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 77.8%, up from 76.3% same quarter last year
  • Unity announced today it has entered into a definitive agreement to acquire Weta Digital

“Unity’s strong performance this quarter was driven by innovation in data science, vertical growth and making significant strides in bringing RT3D technologies and tools to as many creators and artists as possible,” 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 $200.7 million, to $286.3 million.

Unity Total Revenue

And unsurprisingly, this was another great quarter for Unity with revenue up an absolutely stunning 42.6% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $12.7 million in Q3, compared to $38.7 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 25.5% over the next twelve months, although estimates are likely to change post earnings.

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Large Customers Growth

You can see below that at the end of the quarter Unity reported 973 enterprise customers paying more than $100,000 annually, an increase of 85 on last quarter. That is quite a bit more contract wins than last quarter and quite a bit above what we have typically seen lately, demonstrating that the business itself has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

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 $46 billion and more than $1.28 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed how strongly Unity accelerated the rate of new contract wins this quarter. And we were also excited to see the really strong revenue growth. On the other hand, there was a deterioration in gross margin. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. But the market didn't react to the news positively and the company is down 9.59% on the results and currently trades at $155 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.

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