Unity (NYSE:U) Misses Q2 Revenue Estimates

Full Report / September 28, 2022
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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.

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

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.

Instead of having to build everything from scratch, game developers can use Unity’s game engine that handles things like the physics of how players and objects move or how networking and in-app purchases work.

Similarly to when opening a new restaurant a chef just buys an oven and other tools needed, and focuses their effort on the recipes and the food, a game developer can now focus on the story, characters and rules of their game rather than having to build their own tools. While it has been lately venturing into VR and movie production, Unity is still most popular with mobile game makers, powering a large share of the top 1,000 games.

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.

Competitors include Autodesk (NASDAQ: ADSK), Blender, Unreal Engine, and Roblox (NYSE:RBLX).

Sales Growth

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 Total Revenue

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.

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.

Unity customers paying more than $100,000 annually

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Unity Net Revenue Retention Rate

Unity's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 121% in Q2. That means even if they didn't win any new customers, Unity would have grown its revenue 21% year on year. Despite it going down over the last year this is still a good retention rate and a proof that Unity's customers are satisfied with their software and are getting more value from it over time. That is good to see.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Unity's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 67.4% in Q2.

Unity Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Unity burned through $58.2 million in Q2, increasing the cash burn by 74% year on year.

Unity Free Cash Flow

Unity has generated $8.8 million in free cash flow over the last twelve months, 0.72% of revenues. This FCF margin is a result of Unity asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

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 currently trades at $33 per share.

Is Now The Time?

Unity may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Unity is a solid business. Its revenue growth has been strong. And on top of that, its customers are increasing their spending quite quickly, suggesting that they love the product.

Unity's price to sales ratio based on the next twelve months is 9.5x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Unity and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $52.5 per share right before these results, implying that they saw upside in buying Unity even in the short term.

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