UNITY SOFTWARE INC. 
Please read the following discussion and analysis of our financial condition and
results of operations together with our condensed consolidated financial
statements and related notes included under Part I, Item 1 of this Quarterly
Report on Form 10-Q. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. When reviewing
the discussion below, you should keep in mind the substantial risks and
uncertainties that could impact our business. In particular, we encourage you to
review the risks and uncertainties described in "Part II-Other Information,
Item 1A. Risk Factors" included elsewhere in this report. These risks and
uncertainties could cause actual results to differ materially from those
projected in forward-looking statements contained in this report or implied by
past results and trends. Forward-looking statements are statements that attempt
to forecast or anticipate future developments in our business, financial
condition or results of operations. See the section titled "Note Regarding
Forward-Looking Statements" in this report. These statements, like all
statements in this report, speak only as of their date (unless another date is
indicated), and we undertake no obligation to update or revise these statements
in light of future developments.
Overview
Unity is the world's leading platform for creating and operating interactive,
real-time 3D ("RT3D") content.
Our platform provides a comprehensive set of software solutions to create, run,
and monetize interactive, real-time 2D and 3D content for mobile phones,
tablets, PCs, consoles, and augmented and virtual reality devices.
Our platform consists of two distinct, but connected and synergistic, sets of
solutions: Create Solutions and Operate Solutions. Our Create Solutions are used
by content creators-developers, artists, designers, engineers, and architects-to
create interactive, real-time 2D and 3D content. Content can be created once and
deployed to more than 20 platforms, including Windows, Mac, iOS, Android,
PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual
reality platforms, among others. Our Operate Solutions offer customers the
ability to grow and engage their end-user base, as well as run and monetize
their content with the goal of optimizing end-user acquisition and operational
costs, while increasing the lifetime value of their end users.
We launched our first game development engine in 2004, bringing together a set
of tools, such as rendering, lighting, physics, sound, animation, and user
interface, that were designed to address the challenges faced by most game
developers. Prior to Unity, developers primarily created these tools
individually and repetitively across different target platforms, which was an
expensive and time-consuming process. Unity made game development easier and
faster.
In the three months ended June 30, 2021 , we built upon our history of innovation
by achieving a number of milestones that secured our position as the leading
platform for creating and operating interactive, real-time 3D content including
those identified below.
•Unity continues to increase momentum in non-gaming industries. In the second
quarter 2021, Unity added three new automotive manufacturers and also began to
work with several consumer product brands, including an eyewear manufacturer and
retailer, and an appliance manufacturer known for their advanced designs.
Additionally, Unity is getting traction in new markets, including a new contract
with The Nature Conservancy to utilize RT3D digital technologies to convey
information about water usage in New York state . The Nature Conservancy is a
global environment nonprofit with over 1 million members and a diverse staff of
over 400 scientists, making them one of the most effective and wide-reaching
environmental organizations in the world.
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•Unity introduces first-ever sustainability grant. Early in the quarter Unity
announced its Unity for Humanity Environment and Sustainability Grant, a
first-of-its-kind grant program created to help creators who leverage RT3D for
positive environmental change. The grant program, created in collaboration with
the United Nations Environment Programme and Project Drawdown, will have its
first set of awardees in fall 2021.
•Unity acquires PIXYZ and SpeedTree. In Q2, Unity acquired long-time partner
Metaverse Technologies, Inc. , providers of PIXYZ, the 3D data preparation and
optimization software. The acquisition means professional creators can more
easily and quickly import 3D data into Unity and optimize models for real-time
development. Additionally, in July 2021 , Unity acquired Interactive Data
Visualization, Inc. , the creator of the popular SpeedTree environment creation
suite. The acquisition enables a deeper integration of SpeedTree into the Unity
ecosystem, enhancing artist authoring workflows and environment creation
capabilities.
•Unity released synthetic datasets for reduced AI training time and budgets.
Unity announced the Unity Computer Vision Datasets in April 2021 , aimed at
reducing the cost of developing computer vision applications, and more quickly
training Artificial Intelligence (AI) for the manufacturing, retail and security
industries.
We continue to invest in research and development and to pursue selective
acquisitions and partnerships in order to enhance and expand our platform.
Impact of COVID-19
While our total revenue, cash flows, and overall financial condition have not
been adversely impacted to date, the COVID-19 pandemic has caused general
business disruption worldwide beginning in January 2020 . The full extent to
which the COVID-19 pandemic, including any new strains or mutations such as the
delta variant, will directly or indirectly impact our business, results of
operations, and financial condition will depend on future developments that are
highly uncertain and cannot be accurately predicted. Although we may continue to
experience a modest adverse impact on our sales of Create Solutions, our
pipeline of customer opportunities for our Create Solutions was largely back to
normal levels by the end of 2020, as well as our Strategic Partnerships.
Additionally, we have seen an increase in demand for our portfolio of products
and services within Operate Solutions following the implementation of
shelter-in-place orders to mitigate the outbreak of COVID-19, which has resulted
in higher levels of end-user engagement in Operate Solutions and an increase in
revenue, along with a decrease in operating expense due to materially reduced
travel and spending on events and facilities. However, this increased demand for
our Operate Solutions and expense reduction will likely moderate over time,
particularly as vaccines are becoming widely available, and as shelter-in-place
orders and other related measures and community practices evolve. Further, as
certain of our customers or partners experience downturns or uncertainty in
their own business operations or revenue resulting from the COVID-19 pandemic,
they may decrease or delay their spending, request pricing concessions, or seek
renegotiations of their contracts, any of which may result in decreased revenue
for us. In addition, we may experience customer losses, due to factors including
bankruptcy or our customers ceasing operations, which may result in an inability
to collect receivables from these customers. In response to the COVID-19
pandemic, we are also requiring or have required substantially all of our
employees to work remotely to minimize the risk of the virus to our employees
and the communities in which we operate. We are currently planning for our
employees to return to in-person offices later this year, however our plans may
change if the number of COVID-19 cases rises where our offices are located or if
there is an increase in new strains such as the delta variant, and we may take
further actions as may be required by government authorities or that we
determine are in the best interests of our employees, customers, and business
partners.
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The global impact of the COVID-19 pandemic continues to rapidly evolve, and we
will continue to monitor the situation and the effects on our business and
operations closely. We do not yet know the full extent of potential impacts on
our business or operations or on the global economy as a whole, particularly as
the COVID-19 pandemic persists. The rollout of vaccines and the reduction of
COVID-19 cases globally could affect the seasonality of our business or boost
global GDP growth, which could positively impact our business. However, the
return of more in-person activities will result in an increase in our expenses
and could result in a range of impacts to our customers, which could impact our
business. Given the uncertainty, we cannot reasonably estimate the impact on our
future results of operations, cash flows, or financial condition. For additional
details, refer to the section titled "Risk Factors."
Key Metrics
We monitor the following key metrics to help us evaluate the health of our
business, identify trends affecting our growth, formulate goals and objectives,
and make strategic decisions.
Customers Contributing More Than $100,000 of Revenue
We have a history of strong growth in our customer base. We focus on the number
of customers that generated more than $100,000 of revenue in the trailing 12
months, as this segment of our customer base represents the majority of our
revenue and revenue growth. We expect that trend to continue. We define a
customer as an individual or entity that generated revenue during the
measurement period. A single organization with multiple divisions, segments, or
subsidiaries is generally counted as a single customer, even though we may enter
into commercial agreements with multiple parties within that organization. We
had 888 and 716 of such customers in the trailing 12 months as of June 30, 2021
and 2020, respectively, demonstrating our ability to grow our revenues with
existing customers, and our strong and growing penetration of larger
enterprises, including AAA gaming studios and large organizations in industries
beyond gaming. While these customers represented the substantial majority of
revenue for the six months ended June 30, 2021 and 2020, respectively, no one
customer accounted for more than 10% of our revenue for either period.
Dollar-Based Net Expansion Rate
Our ability to drive growth and generate incremental revenue depends, in part,
on our ability to maintain and grow our relationships with our Create and
Operate Solutions customers and to increase their use of our platform. We track
our performance by measuring our dollar-based net expansion rate, which compares
our Create and Operate Solutions revenue from the same set of customers across
comparable periods, calculated on a trailing 12-month basis.
Our dollar-based net expansion rate as of a period end is calculated as current
period revenue divided by prior period revenue. Prior period revenue is the
trailing 12-month revenue measured as of such prior period end and includes
revenue from all customers that contributed revenue during such trailing
12-month period. Current period revenue is the trailing 12-month revenue from
these same customers as of the current period end. Our dollar-based net
expansion rate includes the effect of any customer renewals, expansion,
contraction, and churn but excludes revenue from new customers in the current
period.
As of
June 30, 2021 June 30, 2020
Dollar-based net expansion rate 142 % 142 %
Our dollar-based net expansion rate as of June 30, 2021 and 2020, was driven
primarily by the sales of additional subscriptions and services to our existing
Create Solutions customers, expanded usage among our existing Operate Solutions
customers, and improvements in cross-selling our solutions to all of our
customers.
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The chart below illustrates our strong relationship with existing customers by
presenting our dollar-based net expansion rate as of the end of each of the past
eight quarters.
[[Image Removed: unity-20210630_g1.jpg]]Results of Operations The following table summarizes our historical consolidated statements of operations data for the periods indicated (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue $ 273,562 $ 184,331 $ 508,334 $ 351,325
Cost of revenue 57,725 40,432 116,459 72,300
Gross profit 215,837 143,899 391,875 279,025
Operating expenses
Research and development 154,216 85,108 308,231 166,859
Sales and marketing 74,888 43,716 144,681 86,975
General and administrative 135,917 39,920 199,049 77,473
Total operating expenses 365,021 168,744 651,961 331,307
Loss from operations (149,184) (24,845) (260,086) (52,282)
Interest expense (485) (656) (600) (788)
Interest income and other expense, net 70 (662) 1,635 1,194
Loss before provision for income taxes (149,599) (26,163) (259,051) (51,876)
Provision for income taxes (1,257) 1,188 (3,249) 2,211
Net loss $ (148,342) $ (27,351) $ (255,802) $ (54,087)
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The following table sets forth the components of our condensed consolidated
statements of operations data as a percentage of revenue for the periods
indicated:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 21 22 23 21
Gross margin 79 78 77 79
Operating expenses
Research and development 56 46 61 47
Sales and marketing 27 24 28 25
General and administrative 50 22 39 22
Total operating expenses 133 92 128 94
Loss from operations (55) (13) (51) (15)
Interest expense - - - -
Interest income and other expense, net - - - -
Loss before provision for income taxes (55) (13) (51) (15)
Provision for income taxes - 1 (1) 1
Net loss (55) % (14) % (50) % (16) %
Revenue
We derive revenue from Create Solutions, Operate Solutions, and Strategic
Partnerships and Other.
Create Solutions
We generate Create Solutions revenue primarily through the sale of subscription
fee arrangements for the use of our products and related support services.
We offer subscription plans at various price points and recognize revenue over a
service period that generally ranges from one to three years. We typically bill
our customers on a monthly, quarterly or annual basis, depending on the size of
the contract. As a result of billing our customers in advance, we record
deferred revenue, and a portion of the revenue we report in each period is
attributable to the recognition of deferred revenue related to subscription and
support agreements that we entered into during previous periods.
We generate additional Create Solutions revenue from the sale of professional
services to our subscription customers. These services primarily consist of
consulting, integration, training and custom application and workflow
development, and may be billed in advance or on a time and materials basis.
Operate Solutions
We generate Operate Solutions revenue through a combination of revenue-share and
usage-based business models that we manage as a portfolio of products and
services.
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Our monetization products are primarily based on a revenue-share model. These
products were introduced in 2014 as our first set of Operate Solutions products
and currently account for a substantial majority of our Operate Solutions
revenue. We recognize monetization revenue primarily when an end user installs
an application after seeing an advertisement (contracted on a cost-per-install
basis), and to a lesser extent when an advertisement starts (contracted on a
cost-per-impression basis). Our revenue represents the amount we retain from the
transaction we are facilitating through our Unified Auction. Actions by
operating system platform providers or application stores such as Apple or
Google may affect the manner in which we or our customers collect, use and share
data from end-user devices. For example, Apple recently implemented a
requirement for applications using its mobile operating system, iOS, to
affirmatively (on an opt-in basis) obtain an end user's permission to "track
them across apps or websites owned by other companies" or access their device's
advertising identifier for advertising and advertising measurement purposes, as
well as other restrictions. If end-users do not opt-in to participate in such
tracking as defined by Apple, our ability to monetize through advertising could
suffer. The exact effect and implementation of Apple's changes are not yet
clear, but we expect these changes to adversely affect our revenue from our
monetization products and potentially other Operate Solutions, and such impact
could be material.
We also provide cloud-based services to support the ongoing operation of games
and applications. These include application hosting services, as well as
end-user engagement tools and voice chat services. These services are generally
sold based on usage and billed monthly in arrears. Some of our usage-based
contracts include a minimum fixed-fee usage amount. We expect that our Operate
Solutions beyond monetization, including cloud operations and hosting services,
such as Multiplay, which we introduced in 2018, will grow as a percentage of our
revenue in the long term as we further scale newer products and services and as
we launch additional solutions for gaming customers as well as customers in
other industries.
Strategic Partnerships and Other
We generate Strategic Partnerships revenue primarily from partnership contracts
with hardware, operating system, device, game console, and other technology
providers. Typically, we recognize revenue from these contracts as services are
performed. These partnerships are typically multi-year software development
arrangements with payments that are either made in advance on a quarterly basis
or milestone-based. In addition, certain partners pay us royalties based on the
sales of applications sold on their platform that incorporate or use our
customized software.
We generate Other revenue primarily from our share of sales from our Asset
Store , a marketplace and scaled aggregator for software, content, and tools used
in the creation of real-time interactive games and applications, and from our
Verified Solutions Partners , which sell software and tools certified for quality
and compatibility with our platform.
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Our total revenue is summarized as follows (in thousands, except percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Create Solutions $ 72,364 $ 55,091 $ 17,273 31 % $ 142,751 $ 101,787 $ 40,964 40 %
Operate Solutions 182,916 112,513 70,403 63 % 329,494 216,881 112,613 52 %
Strategic Partnerships
and Other 18,282 16,727 1,555 9 % 36,089 32,657 3,432 11 %
Total revenue $ 273,562 $ 184,331 $ 89,231 48 % $ 508,334 $ 351,325 $ 157,009 45 %
The increase in revenue in the three and six months ended June 30, 2021 compared
to the three and six months ended June 30, 2020 was substantially due to revenue
growth among existing customers. Create Solutions revenue growth was largely
attributable to an increase of new customers, as well as expansion of existing
customers. Within Operate Solutions, the substantial majority of our revenue
growth was driven by an increase in revenue per customer as customers increased
their usage across our Operate portfolio of products and services, due in part
to the higher levels of end-user engagement as a result of strong product and
sales execution. We also saw an increase of new customers within Operate
Solutions.
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Cost of Revenue, Gross Profit, and Gross Margin
Cost of revenue consists primarily of hosting expenses, personnel costs
(including salaries, benefits and stock-based compensation) for employees
associated with our product support and professional services organizations,
allocated overhead (including facilities, information technology ("IT"), and
security costs), third party license fees, and credit card fees, as well as
amortization of related capitalized software and depreciation of related
property and equipment.
Gross profit, or revenue less cost of revenue, has been and will continue to be
affected by various factors, including our product mix, the costs associated
with third-party hosting services, and the extent to which we expand and drive
efficiencies in our hosting costs, professional services, and customer support
organizations. We expect our gross profit to increase in absolute dollars, but
we expect our gross profit as a percentage of revenue, or gross margin, to
fluctuate from period to period.
Our cost of revenue, gross profit, and gross margin are summarized as follows
(in thousands, except percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Cost of revenue $ 57,725 $ 40,432 $ 17,293 43 % $ 116,459 $ 72,300 $ 44,159 61 %
Gross profit $ 215,837 $ 143,899 $ 71,938 50 % $ 391,875 $ 279,025 $ 112,850 40 %
Gross margin 79 % 78 % 1 % 77 % 79 % (2) %
Cost of revenue for the three months ended June 30, 2021 increased primarily due
to an increase of $11.3 million in personnel-related expense driven by a $4.7
million increase in stock-based compensation expense primarily related to the
satisfaction of the performance vesting condition on outstanding RSUs upon
completion of our IPO, and an increase in headcount to support our Create
Solutions and Strategic Partnerships. IT hosting expense also increased by $3.6
million to support growth in our Create and Operate Solutions.
Cost of revenue for the six months ended June 30, 2021 increased primarily due
to an increase of $26.8 million in personnel-related expense driven by a
$9.2 million increase in stock-based compensation expense primarily related to
the satisfaction of the performance vesting condition on outstanding RSUs upon
completion of our IPO, and an increase in headcount to support our Create
Solutions and Strategic Partnerships. IT hosting expense also increased by
$10.5 million to support growth in our Create and Operate Solutions. The
year-over-year decline in gross margin decreased primarily due to higher
personnel-related costs to support our Create Solutions and Strategic
Partnerships, and product mix of revenues.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. The most significant component of our
operating expenses is personnel-related costs, including salaries and wages,
sales commissions, bonuses, benefits, stock-based compensation, and payroll
taxes.
Research and Development
Research and development expenses primarily consist of personnel-related costs
for the design and development of our platform, third-party software services,
professional services, and allocated overhead. We expense research and
development expenses as they are incurred. We expect our research and
development expenses to increase in absolute dollars and may fluctuate as a
percentage of revenue from period to period as we expand our teams to develop
new products, expand features and functionality with existing products, and
enter new markets.
Research and development expense is summarized as follows (in thousands, except
percentages):
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Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Research and development $ 154,216 $ 85,108 $ 69,108 81 % $ 308,231 $ 166,859 $ 141,372 85 %
Research and development expense for the three months ended June 30, 2021
increased primarily due to an increase of $58.2 million in personnel-related
expenses driven by a $27.2 million increase in stock-based compensation expense
primarily related to the satisfaction of the performance vesting condition on
outstanding RSUs upon completion of our IPO and an increase in headcount to
support continued product innovation. In addition, IT hosting expense increased
by $7.3 million due to growing data and compute needs.
Research and development expense for the six months ended June 30, 2021
increased primarily due to an increase of $122.1 million in personnel-related
expenses driven by a $54.1 million increase in stock-based compensation expense
primarily related to the satisfaction of the performance vesting condition on
outstanding RSUs upon completion of our IPO and an increase in headcount to
support continued product innovation. In addition, IT hosting expense increased
by $14.0 million due to growing data and compute needs.
Sales and Marketing
Our sales and marketing expenses consist primarily of personnel-related costs,
advertising and marketing programs, including digital account-based marketing,
user events such as developer-centric conferences and our annual Unite user
conferences; and allocated overhead. We expect that our sales and marketing
expense will increase in absolute dollars as we hire additional personnel,
increase our account-based marketing, direct marketing and community outreach
activities, invest in additional tools and technologies, and continue to build
brand awareness. Our expenses may fluctuate as a percentage of revenue from
period to period.
Sales and marketing expense is summarized as follows (in thousands, except
percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Sales and marketing $ 74,888 $ 43,716 $ 31,172 71 % $ 144,681 $ 86,975 $ 57,706 66 %
Sales and marketing expense for the three months ended June 30, 2021 increased
primarily due to an increase of $23.2 million in personnel-related expenses
driven by a $12.2 million increase in stock-based compensation expense primarily
related to the satisfaction of the performance vesting condition on outstanding
RSUs upon completion of our IPO and an increase in headcount to support the
growth of our sales and marketing teams. Advertisement expenditures on various
social media platforms also increased $4.5 million .
Sales and marketing expense for the six months ended June 30, 2021 increased
primarily due to an increase of $45.9 million in personnel-related expenses
driven by a $22.4 million increase in stock-based compensation expense primarily
related to the satisfaction of the performance vesting condition on outstanding
RSUs upon completion of our IPO and an increase in headcount to support the
growth of our sales and marketing teams. Advertisement expenditures on various
social media platforms also increased $9.0 million .
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General and Administrative
Our general and administrative expenses primarily consist of personnel-related
costs for finance, legal, human resources, IT, and administrative employees;
professional fees for external legal, accounting, and other professional
services; and allocated overhead. We expect that our general and administrative
expenses will increase in absolute dollars and may fluctuate as a percentage of
revenue from period to period as we scale to support the growth of our business.
General and administrative expense is summarized as follows (in thousands,
except percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
General and administrative $ 135,917 $ 39,920 $ 95,997 240 % $ 199,049 $ 77,473 $ 121,576 157 %
General and administrative expense for the three months ended June 30, 2021
increased primarily due to a one-time charge of $49.8 million for the
termination of a future lease contract, including associated construction in
progress write-offs. Personnel-related costs also increased $39.5 million driven
by a $29.3 million increase in stock-based compensation expense primarily
related to the satisfaction of the performance vesting condition on outstanding
RSUs upon completion of our IPO, the incremental equity award modification
expense associated with the separation of our former Chief Financial Officer and
an increase in headcount to support the growth of our finance, accounting, human
resources, IT, and legal functions. In addition, professional and insurance
expense increased $7.8 million due to increased administrative costs as part of
being a public company.
General and administrative expense for the six months ended June 30, 2021
increased primarily due to a one-time charge of $49.8 million for the
termination of a future lease contract, including associated construction in
progress write-offs. Personnel-related costs also increased $60.1 million driven
by a $44.6 million increase in stock-based compensation expense primarily
related to the satisfaction of the performance vesting condition on outstanding
RSUs upon completion of our IPO, the incremental equity award modification
expense associated with the separation of our former Chief Financial Officer,
and an increase in headcount to support the growth of our finance, accounting,
human resources, IT, and legal functions. In addition, professional and
insurance expense increased $10.0 million due to increased administrative costs
as part of being a public company.
Interest Expense
Interest expense consists primarily of interest expense associated with our
Credit Agreement. Interest expense is summarized as follows (in thousands,
except percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Interest expense $ (485) $ (656) $ 171 (26) % $ (600) $ (788) $ 188 *
* Not meaningful
Interest expense and fees related to our undrawn credit facility were recognized
in the three and six months ended
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Interest Income and Other Expense, Net
Interest income and other expense, net, consists primarily of interest income
earned on our cash, cash equivalents, and marketable securities, amortization of
premium arising at acquisition of marketable securities, foreign currency
remeasurement gains and losses, and foreign currency transaction gains and
losses. As we have expanded our global operations, our exposure to fluctuations
in foreign currencies has increased, and we expect this to continue.
Interest income and other expense, net, is summarized as follows (in thousands,
except percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Interest income and
other expense, net $ 70 $ (662) $ 732 (111) % $ 1,635 $ 1,194 $ 441 37 %
Interest income and other expense, net, for the three and six months ended
June 30, 2021 increased primarily due to foreign currency remeasurement gains.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign
jurisdictions where we conduct business. As we have expanded our global
operations, we have incurred increased foreign tax expense, and we expect this
to continue. We have a valuation allowance against certain of our deferred tax
assets, including net operating loss ("NOL") carryforwards and tax credits
related primarily to research and development. Our overall effective income tax
rate in future periods may be affected by the geographic mix of earnings in the
countries in which we operate. Our future effective tax rate may also be
affected by changes in the valuation of our deferred tax assets or liabilities,
or changes in tax laws, regulations, or accounting principles in the
jurisdictions in which we conduct business. See Note 14, "Income Taxes," of the
Notes to Condensed Consolidated Financial Statements.
Provision for income taxes is summarized as follows (in thousands, except
percentages):
Three Months Ended Six Months Ended
June 30, Change June 30, Change
2021 2020 Amount % 2021 2020 Amount %
Provision for income
taxes $ (1,257) $ 1,188 $ (2,445) (206) % $ (3,249) $ 2,211 $ (5,460) (247) %
Provision for income taxes decreased primarily due to the tax benefit from
stock-based compensation activity in the three months ended June 30, 2021 .
Provision for income taxes for the six months ended June 30, 2021 decreased
primarily due to the tax benefit from stock-based compensation activity and the
tax rate change in the United Kingdom that was enacted in the six months ended
June 30, 2021 .
Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared and presented in
accordance with GAAP we use certain non-GAAP performance financial measures, as
described below, to evaluate our ongoing operations and for internal planning
and forecasting purposes. We believe the following non-GAAP measures are useful
in evaluating our operating performance. We are presenting these non-GAAP
financial measures because we believe, when taken collectively, they may be
helpful to investors because they provide consistency and comparability with
past financial performance.
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However, non-GAAP financial measures have limitations in their usefulness to
investors because they have no standardized meaning prescribed by GAAP and are
not prepared under any comprehensive set of accounting rules or principles. In
addition, other companies, including companies in our industry, may calculate
similarly-titled non-GAAP financial measures differently or may use other
measures to evaluate their performance, all of which could reduce the usefulness
of our non-GAAP financial measures as tools for comparison. As a result, our
non-GAAP financial measures are presented for supplemental informational
purposes only and should not be considered in isolation or as a substitute for
our consolidated financial statements presented in accordance with GAAP.
Non-GAAP Gross Profit and Non-GAAP Loss from Operations
We define non-GAAP gross profit as gross profit excluding stock-based
compensation expense and employer tax related to employee stock transactions. We
define non-GAAP loss from operations as loss from operations excluding
stock-based compensation expense, employer tax related to employee stock
transactions, and amortization of acquired intangible assets expense.
We use non-GAAP gross profit and non-GAAP loss from operations in conjunction
with traditional GAAP measures to evaluate our financial performance. We believe
that non-GAAP gross profit and non-GAAP loss from operations provides our
management and investors consistency and comparability with our past financial
performance and facilitates period-to-period comparisons of operations, as these
metrics exclude stock-based compensation expense, employer tax related to
employee stock transactions, amortization of acquired intangible assets expense,
and a one-time expense for the termination of a future lease agreement, which we
do not consider to be indicative of our overall operating performance.
Non-GAAP gross profit and non-GAAP loss from operations have limitations as
analytical tools, and you should not consider them in isolation or as a
substitute for analysis of our results as reported under GAAP. Some of these
limitations are:
•they exclude expense associated with our equity compensation plan, although
equity compensation has been, and will continue to be, an important part of our
compensation strategy;
•non-GAAP loss from operations excludes the expense of amortization of acquired
intangible assets, and although these are non-cash expenses, the assets being
amortized may have to be replaced in the future and non-GAAP loss from
operations does not reflect cash expenditure for such replacements; and
•the expenses and other items that we exclude in our calculation of non-GAAP
gross profit and non-GAAP loss from operations may differ from the expenses and
other items, if any, that other companies may exclude from this measure or
similarly titled measures, which reduces their usefulness as comparative
measures.
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The following table presents a reconciliation of our non-GAAP gross profit to
our GAAP gross profit, the most directly comparable measure as determined in
accordance with GAAP, for the periods presented (in thousands):
Three Months Ended
June 30,
2021 2020
GAAP gross profit $ 215,837 $ 143,899
Add:
Stock-based compensation expense 5,340 690
Employer tax related to employee stock transactions 511 2
Non-GAAP gross profit $ 221,688 $ 144,591
GAAP gross margin 79 % 78 %
Non-GAAP gross margin 81 % 78 %
The year-over-year increase in non-GAAP gross margin was primarily due to strong
product optimizations and lower unit costs in Operate Solutions as well as lower
platform costs to support Strategic Partnerships.
The following table presents a reconciliation of our non-GAAP loss from
operations to our GAAP loss from operations, the most directly comparable
measure as determined in accordance with GAAP, for the periods presented (in
thousands):
Three Months Ended
June 30,
2021 2020
GAAP loss from operations $ (149,184) $ (24,845)
Add:
Stock-based compensation expense 85,400 11,963
Employer tax related to employee stock transactions 6,126
75
Amortization of intangible assets expense 4,709
4,150
Lease termination expense 49,795
-
Non-GAAP loss from operations$ (3,154) $
(8,657)
The year-over-year decrease in non-GAAP loss from operations was primarily due
to strong revenue growth in Operate Solutions, non-GAAP gross margin
improvements, and gaining operating expense leverage across sales and marketing
and general and administrative.
Non-GAAP Net Loss and Non-GAAP Net Loss per Share
We define non-GAAP net loss and non-GAAP net loss per share as net loss and net
loss per share excluding stock-based compensation expense, employer tax related
to employee stock transactions, amortization of acquired intangible assets
expense, and a one-time expense for the termination of a future lease agreement,
as well as the related tax effects of these items. Non-GAAP net loss per share
also adds back expense relating to deemed dividends representing excess paid
over initial issuance price to repurchase convertible preferred stock. We use
non-GAAP net loss and non-GAAP net loss per share in conjunction with
traditional GAAP measures to evaluate our financial performance. We believe that
these non-GAAP measures provide our management and investors consistency and
comparability with our past financial performance and facilitates
period-to-period comparisons of operations.
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Non-GAAP net loss and non-GAAP net loss per share have limitations as analytical
tools, and you should not consider them in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these limitations are:
•they exclude expense associated with our equity compensation plan, although
equity compensation has been, and will continue to be, an important part of our
compensation strategy;
•they exclude the expense of amortization of acquired intangible assets, and
although these are non-cash expenses, the assets being amortized may have to be
replaced in the future and non-GAAP loss from operations does not reflect cash
expenditure for such replacements;
•as further described below, we must make certain assumptions in order to
determine the income tax effect adjustment for non-GAAP net loss, which
assumptions may not prove to be accurate; and
•the expenses and other items that we exclude in our calculation of non-GAAP net
loss and non-GAAP net loss per share may differ from the expenses and other
items, if any, that other companies may exclude from this measure or similarly
titled measures, which reduces their usefulness as comparative measures.
Income Tax Effects of Non-GAAP Adjustments
We utilize a fixed projected tax rate in our computation of non-GAAP income tax
effects to provide better consistency across interim reporting periods. In
projecting this non-GAAP tax rate, we utilize a financial projection that
excludes the direct impact of the non-GAAP adjustments described above, and
eliminates the effects of non-recurring and period specific items which can vary
in size and frequency. The projected rate considers other factors such as our
current operating structure, existing tax positions in various jurisdictions,
and key legislation in major jurisdictions where we operate. For the year ended
December 31, 2020 , the non-GAAP tax rate was (17%). For the year ending
December 31, 2021 , we have determined the projected non-GAAP tax rate to be
(22)%. We will periodically re-evaluate this tax rate, as necessary, for
significant events, based on relevant tax law changes, material changes in the
forecasted geographic earnings mix, and any significant acquisitions.
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The following table presents a reconciliation of our non-GAAP net loss and
non-GAAP net loss per share to our GAAP net loss and GAAP net loss per share,
respectively, which are the most directly comparable measures as determined in
accordance with GAAP, for the periods presented (in thousands, except per share
data):
Three Months Ended
June 30,
2021 2020
GAAP net loss $ (148,342) $ (27,351)
Add:
Stock-based compensation expense 85,400 11,963
Employer tax related to employee stock transactions 6,126 75
Amortization of intangible assets expense 4,709 4,150
Lease termination expense 49,795 -
Income tax effect of non-GAAP adjustments (2,042) (657)
Non-GAAP net loss $
(4,354)
GAAP net loss per share attributable to our common stockholders, basic and diluted
$
(0.53)
0.51 0.12
Non-GAAP net loss per share attributable to our common stockholders, basic and diluted
$
(0.02)
Weighted-average common shares used in GAAP net loss per share computation, basic and diluted
280,374 129,826
Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted
280,374 129,826
Free Cash Flow
We define free cash flow as net cash used in operating activities less cash used
for purchases of property and equipment. We believe that free cash flow is a
useful indicator of liquidity as it measures our ability to generate cash, or
our need to access additional sources of cash, to fund operations and
investments.
Free cash flow has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. Some of these limitations are:
•it is not a substitute for net cash used in operating activities;
•other companies may calculate free cash flow or similarly titled non-GAAP
measures differently or may use other measures to evaluate their performance,
all of which could reduce the usefulness of free cash flow as a tool for
comparison; and
•the utility of free cash flow is further limited as it does not reflect our
future contractual commitments and does not represent the total increase or
decrease in our cash balance for any given period.
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The following table presents a reconciliation of free cash flow to net cash used
in operating activities, the most directly comparable measure as determined in
accordance with GAAP, for the periods presented (in thousands):
Six Months Ended June 30,
2021 2020
Net cash used in operating activities$ (115,563) $
(15,419)
Less:
Purchase of property and equipment (18,551)
(19,275)
Free cash flow$ (134,114) $
(34,694)
Net cash used in investing activities$ (203,765) $
(43,363)
Net cash provided by financing activities$ 38,059 $
387,405
The year-over-year decrease in free cash flow was primarily due to the payment of the bonus for our fiscal year endedDecember 31, 2020 , our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate. Liquidity and Capital Resources Since inception, we have financed our operations primarily through the net proceeds we have received from the sales of our convertible preferred stock and common stock and through payments received from customers using our platform. As ofJune 30, 2021 , our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling$1.6 billion , which were primarily held for working capital purposes. Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of$1.1 billion as ofJune 30, 2021 . We expect to continue to incur operating losses for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative. As a result, we may require additional capital to execute our strategic initiatives to grow our business. We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. Our future capital requirements, however, will depend on many factors, including our growth rate; the timing and extent of spending to support our research and development efforts; capital expenditures to build out new facilities and purchase hardware and software; the expansion of sales and marketing activities; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary products, teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected. 41 -------------------------------------------------------------------------------- Table of ContentsUnity Software Inc.
Our changes in cash flows were as follows (in thousands):
Six
Months Ended
2021 2020
Net cash used in operating activities $ (115,563) $ (15,419)
Net cash used in investing activities (203,765) (43,363)
Net cash provided by financing activities 38,059 387,405
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
89 (52)
Net change in cash, cash equivalents, and restricted cash
$ 328,571 Cash Used in Operating Activities During the six months endedJune 30, 2021 , net cash used in operating activities was$115.6 million and was primarily due to the payment of the bonus for our fiscal year endedDecember 31, 2020 , our net loss, higher payroll taxes on stock-based compensation, prepayments of software licenses, an increase in working capital as our business grows, and a one-time payment related to our real estate . A substantial portion of our accounts receivable balance comes from advertising partners and is offset by an accounts payable amount due to our publishers (Operate Solutions customers). However, the payment terms that we offer our advertising partners are generally shorter than the payment terms with our publishers (Operate Solutions customers). As such, our cash flows fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments. Historical cash flows are not necessarily indicative of our results in any future period. Cash Used in Investing Activities During the six months endedJune 30, 2021 , net cash used in investing activities was$203.8 million , consisting of the purchase of marketable securities of$290.8 million , cash used in acquisitions of$69.4 million , and capital expenditures of$18.6 million partially offset by proceeds of$179.6 million from marketable security principal repayments and maturities. Cash Provided by Financing Activities During the six months endedJune 30, 2021 , net cash provided by financing activities was$38.1 million and consisted solely of proceeds from the exercise of stock options. Contractual Obligations The following table summarizes our contractual obligations as ofJune 30, 2021 (in thousands): Payments Due by Period More than 5 Total Less than 1 Year 1-3 Years 3-5 Years Years Operating leases (1)$ 149,299 $ 15,503$ 75,631 $ 16,290 $ 41,875 Purchase commitments (2) 119,294 15,036 88,633 15,625 - Total (3)$ 268,593 $ 30,539$ 164,264 $ 31,915 $ 41,875 (1) Operating lease obligations consist primarily of obligations for real estate. (2) The substantial majority of our purchase commitments are related to agreements with our data center hosting providers. (3) This table generally excludes amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities. 42 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements and did not have any material holdings in variable interest entities as ofJune 30, 2021 . Critical Accounting Policies and Estimates Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and the amount of revenue and expenses that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and any such differences may be material. There have been no material changes to our critical accounting policies and estimates during the six months endedJune 30, 2021 , as compared to those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 5, 2021 . Recent Accounting Pronouncements See Note 2, "Summary of Accounting Pronouncements," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk Foreign currency exchange risk Our assessment of our exposures to market risk has not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 5, 2021 . Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on management's evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified inSEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. 43 -------------------------------------------------------------------------------- Table of Contents Unity Software Inc. (b) Changes in Internal Control Over Financial Reporting Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recently completed fiscal quarter. Based on that evaluation, our principal executive officer and principal financial officer concluded that there has not been any material change in our internal control over financial reporting during the quarter covered by this report that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, despite the fact that the majority of our employees are continuing to work remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to understand the potential impact on their design and operating effectiveness. 44
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