Unity Technologies has raised more than $1.3 billion in an initial public offering (IPO) at a $13.6 billion valuation. Unity makes tools for developers to create games and other computer-generated entertainment, and its game engine runs thousands of console, mobile, and PC titles.
The San Francisco-based Unity filed its S-1 statement with the U.S. Securities and Exchange Commission a month ago, revealing its financials for the first time. Some people were alarmed at how much money the company was losing, but others were impressed with the long-term stability of its subscription base. Earlier this week, Unity priced its shares in the $44-to-$48 a share range, higher than an earlier $34-to-$42 a share range, as feedback from potential investors was better than expected. It opened at $52 a share under the symbol $U.
In 2019, the San Francisco maker of the Unity game engine — used by 1.5 million monthly active users to create games and other content — reported a loss of $163.2 million revenue of $541.8 million. In 2018, the company reported a loss of $131.6 million on revenue of $380.7 million.
For the first six months of 2020, Unity reported a loss of $54.1 million on revenue of $351.3 million in 2019, compared with a loss of $67 million on revenues of $252.7 million in 2019. All told, Unity has lost $569.3 million to date. Unity has about $125 million in debt on its line of credit, and so the IPO money will go a long way toward shoring up the company’s cash as it works toward a profitable business.
Unity is one of the most important technologies in gaming, as software built with its tools runs on more than 1.5 billion devices. Unity said that its platform is used in over 50% of mobile games, PC games, and console games. Its rivals include Epic Games’ Unreal Engine, as well as more specialized engines such as Cocos2d. Unity believes its addressable market is $29 billion across games and entertainment such as TV commercials or animated films. Games made in Unity include Fall Guys: Ultimate Knockout, Township, Ori and the Will of the Wisps, and Oddworld: Soulstorm.
To mark the occasion, Unity had its 3,379 employees participate in a virtual 3D bellringing on the New York Stock Exchange on Friday morning. That was a first for the NYSE. Unity’s motto is “the world is a better place with more creators in it.”
Unity CEO John Riccitiello said in a presentation before the IPO that the company referred to the event as a UPO, where Unity’s own management team chose who got the initial allotment of the shares, rather than the investment bankers choosing the investors. The departure from the usual practice of an IPO was to be data-driven and select the investors who wanted to hold on to the stock for the longer term.
“We wanted to select investors we were proud to partner with,” Riccitiello said.
While Unity makes money on subscriptions, it is also very dependent on advertising for revenue. That’s a tough business at the moment, and it’s become more uncertain with Apple’s recent decision to retire its Identifier for Advertisers (IDFA), which is akin to a cookie that helps with targeted advertising. Apple is doing this in the name of privacy, though it recently postponed the retirement as the game and app industry prepares new advertising approaches. Mobile advertising may prove to be more difficult ahead, and that could affect Unity.
Unity said one risk factor is its dependence on makers of operating systems, who may change their business practices or policies.
Unity faces tough competition from Unreal Engine, which has been boosted by Epic’s success with Fortnite. In 2019, Epic Games reported $730 million in earnings on revenue of $4.2 billion, according to information obtained by GamesBeat. Epic recently raised a couple of rounds of funding at a valuation of $17.3 billion. The rounds included $250 million from Sony, which has a 1.4% stake in the company. But Epic Games is locked in a difficult antitrust lawsuit, as it has accused Apple of monopolistic abuses in the mobile gaming market.
Unity said its engine has customers in games and other apps, with 3 billion downloads per month. The company said developers start about 150,000 new projects each day in 190 countries.
The Unity game engine differs from Unreal in its origins. Founders David Helgason, Nicholas Francis, and Joachim Ante started it in 2004 as a game company. Their first game failed, but they found that the tools they made to simplify game development were a commercial opportunity, and they pivoted to a mission of “democratizing” game development. They targeted both 2D and 3D content, particularly in the fledgling mobile game industry. When the iPhone launched in 2007, Unity started taking off. Now it is moving to higher-quality productions and tools, giving competition to the PC and console focus of Unreal Engine. Both companies are meeting in the competitive middle, with Unity coming up from the low end and Epic Games moving down from the high end.
The game engines are critical now because they enable developers to save time. They write the games once for the engine, which then converts the code so that it can run across a variety of platforms, which have multiplied over the years. In 2014, former Electronic Arts CEO Riccitiello replaced Helgason as CEO. Lately, Unity has been expanding beyond the game industry into other entertainment, and it has also been acquiring companies such as Digital Monarch Media, DeltaDNA, Vivox, Artomatix, and Codice Software. All told, Unity has acquired eight companies since the start of 2019, and more than a dozen since 2011.
Customers include game developers, artists, architects, filmmakers, and automotive designers. Unity noted that it had 515 customers with more than $100,000 in revenue for the first half of 2020. The company said its capability to cross-sell and expand subscriptions with customers, as well as attract new customers, is key to its financial performance. About 76% of revenue comes from outside the U.S.
Meanwhile, Unity has been raising a lot of money at higher and higher valuations. In May 2019, Unity raised $150 million at a $6 billion valuation, on top of $600 million raised prior. Unity has been investing heavily in research and development, with more than $450 million allocated in the past two fiscal years.
Unity’s big shareholders include Sequoia Capital, which owns 24.1%, followed by affiliates of Silver Lake Partners with 18.2% and J.A. Technologies with 8.2%. Unity plans to use the money for its own financial flexibility and general corporate purposes, as well as pay $125 million in debt from its credit facility. Riccitiello owns 0.4% of the company, while Helgason owns 4.4%.
The company noted that gaming continues to be the fastest-growing segment of media, and game developers are turning to external solutions such as Unity rather than developing their own in-house proprietary game engines.
As for risk factors, Unity cited its history of losses and said it “may not achieve or sustain profitability in the future,” as well as a limited operating history. Its growth may be limited if it is unable to expand into new industries, and its markets remain competitive. Unity qualifies as an “emerging growth company,” which means it isn’t subject to as many reporting requirements. For instance, it only has to include two years of financial data in the IPO registration. Unity hasn’t yet said how much it will raise, as that will come after further steps in the IPO process.
As of June 30, Unity had $453.2 million in cash and total assets of $1.29 billion. Unity said it saw more than 15,000 new projects a day started on its engine in the first half of 2020. Players playing games based on Unity recorded over 8 billion hours of gameplay per month in the six months ended June 30, 2020. Unity’s developers created more than 8,000 games and apps a month in the same six months.
Unity said it had 1,879 employees in R&D as of June 30. That’s about 56% of its overall headcount.
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