Unity Technologies reported its first quarterly earnings as a public company today, with revenues for the third quarter ended September 30 hitting $200.8 million, up 53.3% from the same quarter a year ago.
Unity’s quarterly loss from operations was $141.7 million, or 70.6% of revenue, compared to a loss from operations of $41.7 million, or 31.9% of revenue, in the third quarter of 2019.
The third-quarter results were impacted by a one-time charge associated with restricted stock from the initial public offering (IPO), as well as a charge related to the donation of 750,000 shares of the common stock to a charitable foundation upon closing of Unity’s IPO.
The non-GAAP loss from operations was $8.4 million, compared to a loss of $27.8 million a year earlier. On a per-share basis, the non-GAAP loss was 9 cents, compared to a loss of 67 cents a share a year earlier.
Analyst Michael Pachter of Wedbush Securities said in a note it was a “stellar quarter. Analysts expected revenues of $187 million and he had expected $190 million, and the consensus for the non-GAAP loss was about $29 million.
On September 18, Unity raised more than $1.3 billion in an IPO on the New York Stock Exchange 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.
“Companies in the gaming industry have been using real-time 3D technology to create immersive, interactive content for over two decades, and we are proud to be able to support more than 90% of the top game companies globally,” CEO John Riccitiello said in a statement. “Now developers in other industries are taking note and engaging with Unity in transforming their content to be real-time 3D. Creators — from game developers to artists, architects, automotive designers, filmmakers, and more — are turning to Unity to bring their imaginations to life.”
The company said the results reflect the resilience of its business model and strong execution across teams and geographies.
For the full year ending December 31, 2020, Unity said it expects revenues of $752 million to $756 million, with the operating loss hitting $66 million to $71 million. Fourth-quarter revenue is expected to be between $200 million and $204 million. Non-GAAP operating profit margin is expected to be a loss of $35 million to $45 million.
As of September 30, 2020, 739 customers generated more than $100,000 of revenue in the trailing 12 months, compared to 553 a year earlier.
In 2019, the San Francisco maker of the Unity game engine — with 1.5 million monthly active users that create games and other content — reported a loss of $163.2 million on 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 revenue of $252.7 million in 2019. All told, Unity has lost $569.3 million to date. The company has about $125 million in debt on its line of credit, but the IPO money will go a long way toward shoring up its cash as it works to become a profitable business.
Unity is one of the most important technologies in gaming, as software built with its tools is running on more than 1.5 billion devices. Unity said its platform is used in over 50% of mobile games, PC games, and console games. 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, including TV commercials and animated films. Games made in Unity include Fall Guys: Ultimate Knockout, Township, Ori and the Will of the Wisps, and Oddworld: Soulstorm.
Unity’s motto is “The world is a better place with more creators in it,” and the company reported 3,379 employees in the second quarter. It claimed 1,879 employees in R&D as of June 30, or about 56% of its overall headcount.
While Unity has some chart-toppers like Fall Guys, it doesn’t have a meaningful share of triple-A titles. Most of those games are made by big companies with their own game engines, like Activision Blizzard, Electronic Arts, Take-Two Interactive, and Ubisoft. That said, Unity has about 60 companies working on PlayStation 5 games, Riccitiello said.
“We are gaining on all fronts and expect to gain on all fronts,” he said.
Riccitiello said in an analyst call that he hopes hundreds of millions of consumers will be using Unity’s tools to create their own user-generated content in the long run.
“Expect us to build out an entirely new user base in the months and years ahead,” Riccitiello said.
He also said the company is focused on getting market share in the game engine market, rather than short-term profits.
Unity CFO Kim Jabal said in an analyst call that users are engaged like never before with the console launches. It’s as if the holiday game-playing season was already here.
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. But mobile advertising may soon prove more difficult, which could affect Unity.
In the analyst call, Riccitiello said the company has an advantage with data that may help insulate it from the retirement of IDFA. He said he didn’t see any material effects coming from the IDFA change yet.
Pachter, the Wedbush analyst, said, “While a decline in brand and product advertising is likely to lower overall advertising demand, we expect the impact to be a lowering of ad rates for game advertisers, driving up the return on user acquisition spending (or cost, abbreviated UAC). We have spoken to at least a dozen game publishers and developers, and have gotten a consistent message: lower UAC and higher ROI will lead to increased frequency of ad delivery, which should serve to benefit Unity.”
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 after accusing 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 a total of 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 a commercial opportunity in the tools they made to simplify game development, 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 began 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 help developers save time. Developers write the games once for the engine, which then converts the code so it can run across a variety of platforms, which have multiplied over the years.
People 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.
Updated: 7:46 a.m. Pacific on 11/13/20 with Pachter comments.
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