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Item 7. Management’s Discussion and Analysis

2024-02-29 compared with 2023-02-27 · 120 added, 169 removed, 192 unchanged (60% of the section changed)

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Discussion of 2021 and year-over-year comparisons between fiscal 2022 and 2021 that are not included in this Form 10-K can be found under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that was filed with the SEC on February 27, 2023, and are incorporated by reference herein.

Unity is the world’s leading platform for creating and operating interactive, RT3D content.

Unity Software Inc.

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 Grow Solutions.

ironSource Merger

In November 2022, we completed the ironSource Merger.

Following the transaction, ironSource forms part of our Grow Solutions (which we referred to prior to the acquisition as Operate solutions).

(See below for a discussion of the changes to how we present revenue results following the ironSource Merger and Item 8 of Part II, "Financial Statements and Supplementary Data" – Note 5 – Acquisitions, for further discussion of the acquisition.)

Impact of Macroeconomic Trends

Recent negative macroeconomic factors, such as inflation and corresponding higher interest rates, the strengthening of the U.S.

dollar, and the softening of the advertising market has negatively impacted our business, particularly our Grow Solutions, and may continue to do so.

We are managing costs in light of these factors and continuing to monitor their actual and potential direct and indirect impacts on us and our customers.

The impact of these macroeconomic trends remains uncertain, and we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.

Unity is the world's leading platform for creating and growing interactive, real-time 3D ("RT3D") content and experiences.

Our comprehensive set of software, including AI solutions, supports creators through the entire development lifecycle as they build, run, and grow immersive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, and augmented and virtual reality devices.

Our platform consists of two complementary sets of solutions:

Create Solutions and Grow Solutions, which together comprise our strategic portfolio surrounding the Unity Engine, Cloud and Monetization.

Impact of Macroeconomic Trends and Geopolitical Events

Recent negative macroeconomic factors, such as inflation, high interest rates, and limited credit availability have and could further cause economic uncertainty and volatility, which could harm our business.

Further, increased competition in the advertising market and ongoing restrictions related to the gaming industry in China have impacted our growth rates and may continue to do so.

Ongoing geopolitical instability, particularly in Israel, where a significant portion of our Grow Solutions operations is located, may adversely affect our business.

Recent Developments in Our Business

In the third quarter of 2023, we announced changes to our pricing model for our Create Solutions, which will become effective for users of the next major release of the software expected to be available in 2024.

We experienced a high volume of negative customer feedback including a boycott and a slowdown of signing new contracts and renewals as a result of these changes, which we believe negatively impacted our Grow Solutions revenue in the second half of 2023.

While we expect a potential benefit from this change over the long term for our business, the ultimate impact on our business remains uncertain.

In the fourth quarter of 2023, we underwent a CEO change and began a comprehensive assessment of our product portfolio and our cost structure, to focus on those offerings that are most valuable to our customers, which are the core aspects of our Create and Grow Solutions.

In this effort to reset, we plan to meaningfully decrease our offering of professional services and hardware components that support our hosting services and cease further development of our artistry tools.

Together, these offerings contributed approximately $280 million of revenue in 2023, predominately within Create Solutions.

In addition, in the fourth quarter of 2023 and the first quarter of 2024, we announced reductions to our workforce and our office footprint.

In the fourth quarter of 2023 we incurred approximately $16 million of impairment charges on operating leases.

In the first quarter of 2024, we expect to recognize approximately $195 million in employee separation costs, primarily related to the acceleration and modifications of equity awards.

These costs associated with lease terminations and employee separations encompass the substantive cost components of our restructuring efforts.

Our ability to execute on these plans or execute them in a timely manner is critical to our success, and their timing and full impact on our future results of operations, cash flows, or financial condition are uncertain.

For additional details, refer to the section titled "Risk Factors."

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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 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.

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 1,340, 1052, and 793 such customers in the trailing 12 months as of December 31, 2022, 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.

We also experienced an increase of these customers as a result of the acquisition of ironSource.

A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer,

Unity Software Inc.

even though we may enter into commercial agreements with multiple parties within that organization.

We had 1304, 1340, and 1052 such customers in the trailing 12 months as of December 31, 2023, 2022, and 2021, respectively.

The year over year decrease was largely a result of our de-emphasis on professional services and hosting services, as well as a more competitive environment for our Monetization solutions in 2023.

While these customers represented the substantial majority of revenue for the years ended December 31, 2023, 2022, and 2021, respectively, no one customer accounted for more than 10% of our revenue for any of those years.

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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 Grow 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 Grow Solutions revenue from the same set of customers across comparable periods, calculated on a trailing 12-month basis.

Unity Software Inc.

We track our performance by measuring our dollar-based net expansion rate, which compares our Create and Grow Solutions revenue, excluding Strategic Partnerships and, starting in the first quarter of 2023, Supersonic, from the same set of customers across comparable periods, calculated on a trailing 12-month basis.

Had we excluded Supersonic in the fourth quarter of 2022, the dollar-based net expansion rate would have been 118%.

Our dollar-based net expansion rate as of a period end is calculated as current period revenue divided by prior period revenue.

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Our dollar-based net expansion rate as of December 31, 2023, 2022, and 2021 was driven primarily by the sales of additional subscriptions and services to our existing Create Solutions customers and cross-selling our solutions to all of our customers.

The decrease in dollar-based net expansion rate, compared to the comparable prior year periods, is attributable to Grow Solutions and follows a similar trend to the revenue decrease seen from those solutions prior to the ironSource Merger due to softness in the advertising market.

The chart below illustrates that our dollar-based net expansion rate has been declining over the last year with a slight rebound in the fourth quarter due to the ironSource Merger.

Despite this decline, we are still maintaining strong relationships with our existing customers.

The decrease in dollar-based net expansion rate, compared to the comparable prior year periods, is primarily attributable to Grow Solutions, due to increased competition in the advertising market.

The chart below illustrates that our dollar-based net expansion rate has been declining over the last year with a slight rebound in the fourth quarter of 2022 due to the ironSource Merger.

Unity Software Inc.

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Net loss $ (826,322) $ (919,488) $ (532,607)

Unity Software Inc.

The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue for the periods indicated:

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Cost of revenue 34 32 23

Gross margin 68 77 78

Gross profit 66 68 77

Operating expenses

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Net loss (38) % (66) % (48) %

Unity Software Inc.

During the fourth quarter of 2022, we completed our acquisition of ironSource.

Following the merger, we made adjustments to our internal reporting structure to focus on our two complementary and interconnected solutions:

Create and Grow Solutions.

Our revenue presentation for the years ended December 31, 2022, 2021, and 2020 has been aligned with this new approach by including annual revenue of approximately $82.7 million, $74.8 million, and $70.0 million, respectively, related to Strategic Partnerships and Other in Create Solutions and moving annual revenue of approximately $125.6 million, $105.5 million, and $71.4 million, respectively, related to Unity Gaming Services, which provide hosting and cloud operations services, from Operate Solutions to Create Solutions.

Create Solutions are primarily focused on content development and operations, while Grow Solutions include Unity monetization and all ironSource businesses, which in combination provide customers with a platform that encompasses testing, user acquisition, growth, and retention capabilities.

Create Solutions

We generate Create Solutions revenue primarily through our suite of Create Solutions subscriptions, enterprise support, professional services and cloud and hosting services.

We generate Create Solutions revenue primarily through our suite of Create Solutions subscriptions inclusive of enterprise support, professional services, and cloud and hosting services.

Our subscriptions provide customers access to technologies that allow them to edit, run, and iterate interactive, RT3D and 2D experiences that can be created once and deployed to a variety of platforms.

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Grow Solutions

We generate Grow Solutions revenue primarily through our monetization solutions, user acquisition offerings, and Supersonic, a game publishing service.

We generate Grow Solutions revenue primarily through our monetization solutions and game publishing services.

Our monetization solutions allow publishers, original equipment manufacturers, and mobile carriers to sell available advertising inventory on their mobile applications or hardware devices to advertisers for in-application or on-device placements.

Our revenue represents the amount we retain from the transaction we are facilitating through our Unified Auction and mediation platform.

Supersonic provides game developers with the infrastructure and expertise to launch their mobile games and manage their growth;

Our game publishing services provide game developers with the infrastructure and expertise to launch their mobile games and manage their growth;

this is achieved through marketability testing tools, live games management tools and game design support, and optimizing the implementation of the customer's commercial model.

Through Supersonic, we generate revenue from in-app advertising in published games and in some cases, in app purchase revenue.

Through these publishing services, we generate revenue from in-app advertising in published games and in some cases, in app purchase revenue.

Unity Software Inc.

Our total revenue is summarized as follows (in thousands):

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Total revenue $ 2,187,317 $ 1,391,024 $ 1,110,526

The increase in total revenue for the year ended December 31, 2022, compared to the comparable prior year period, w as primarily due to an increase in new customers, as well as growth among existing customers, within Create Solutions.

Revenue from Grow Solutions increased for the year ended December 31, 2022 due to the ironSource Merger and inclusion of ironSource revenue from the date of acquisition in November.

The increase in revenue attributable to ironSource was partially offset by declines in our monetization business year over year prior to the acquisition due to gaps in our offerings which we believe ironSource will help fill, operational challenges experienced in earlier quarters of 2022, which included data quality and accuracy delays, and external factors, including the competitive landscape, negative macroeconomic conditions including impacts on customer spending, and reduced advertiser spend.

Unity Software Inc.

The increase in total revenue for the year ended December 31, 2023, compared to the comparable prior year period, was primarily due to the acquisition and inclusion of revenue from ironSource within Grow Solutions.

Grow Solutions revenue includes approximately $72 million related to the return of customer incentives issued by ironSource prior to the merger and we do not expect to receive any material amounts in future periods.

Grow Solutions revenue was also negatively impacted by increased competition, which we expect will continue in 2024.

Revenue from Create Solutions increased for the year ended December 31, 2023, compared to the comparable prior year periods, primarily due to approximately $99 million of incremental revenue in the fourth quarter of 2023 from Wētā FX Limited, as a result of terminating their subscription rights in exchange for a perpetual license, and growth among existing customers primarily due to our price increases.

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 developed technology intangible assets, related capitalized software and depreciation of related property and equipment.

Cost of revenue consists primarily of personnel costs (including salaries, benefits, and stock-based compensation) for employees and subcontractors associated with our product support and professional services organizations, the amortization of intangible assets, hosting expenses, 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 in the long term, but we expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.

Cost of revenue for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with increased headcount, as well as an increase of $44.6 million in amortization expenses related to developed technology intangible assets acquired through our business acquisitions and an increase of $18.8 million in hosting expenses in Grow Solutions.

Gross profit for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to an increase in revenue in our Create Solutions.

Gross margin decreased for the year ended December 31, 2022, compared to the comparable prior year period, due to the aforementioned increases in expenses and amortization, the challenges our monetization business experienced earlier in the year, and a shift in revenue mix to lower margin services.

We expect our gross profit to increase in absolute dollars in the long term but decrease in the short term as we reset our product portfolio to focus on the Unity Engine and Monetization solutions.

We expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.

Cost of revenue for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to an increase of approximately $197 million in amortization expenses related to intangible assets acquired through our business combinations, including $105 million of incremental expense in the fourth quarter of 2023 due to fully amortizing an intangible assets related to the Wētā FX Limited contract that was terminated, as well as higher personnel-related expenses.

Operating Expenses

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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.

Although personnel-related costs contributed to the majority of the increase in expense period over period, we are slowing down our hiring efforts and focusing on containing the growth rate of other expenses in an effort to manage costs in light of a worsening macroeconomic environment

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 for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased to support continued product innovation and as a result of our acquisition of ironSource.

Amortization expense related to intangible assets acquired through our business acquisitions increased by approximately $64.0 million.

The increase was further driven, to a lesser extent, by higher hosting expenses and travel and conference expenditures due to the softening of COVID-19 restrictions.

Although personnel-related costs contributed to the increase in expense period over period primarily due to the increased headcount resulting from the ironSource Merger, we have been evaluating our headcount needs, slowing down our hiring efforts, reducing the number of managerial layers, and focusing on containing the growth rate of other expenses.

In November 2023, we announced an amendment of our agreements with Wētā FX Limited, and committed to a plan to close corporate offices in approximately 14 locations.

Following these announcements, we incurred incremental expenses of approximately $121 million from fully amortizing contract intangible assets related the Wētā FX Limited, primarily within cost of revenue.

We also incurred restructuring and reorganization expenses of approximately $70 million for the year ended December 31, 2023, of which $52 million related to reductions in our workforce, largely within research and development expense, and $18 million related to

Unity Software Inc.

our intent to exit certain leased facilities, primarily impairment charges on operating lease assets in general and administrative expense.

Research and Development

Research and development expenses primarily consist of personnel-related costs for the design and development of our platform, IT hosting and SaaS expenses, and amortization expenses related to intangible assets.

We expect our research and development expenses to increase in absolute dollars in the long term, as we expand our teams to develop new solutions, expand features and functionality with existing solutions, and enter new markets, but decrease in the short term as we reset our strategic portfolio.

We expect research and development expenses to fluctuate as a percentage of revenue from period to period.

Research and development expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related, and hosting expenses resulting from the ironSource Merger.

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 for the year ended December 31, 2022 i ncreased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased to support the growth of our sales and marketing teams and as a result of our acquisition of ironSource.

Amortization expense related to intangible assets acquired through our business acquisitions increased by approximately $45.0 million.

The increase for the year ended December 31, 2022 was further driven, to a lesser extent, by increased travel and conference expenditures due to the softening of COVID-19 restrictions.

Our sales and marketing expenses consist primarily of personnel-related costs, advertising and marketing programs, including user acquisition costs and digital account-based marketing, user events such as developer-centric conferences and our annual Unite user conferences, and amortization expenses related to intangible assets.

We expect that our sales and marketing expense will increase in absolute dollars in the long term, 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, but decrease in the short term as we reset our strategic portfolio.

We expect sales and marketing expenses to fluctuate as a percentage of revenue from period to period.

Sales and marketing expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to an increase in amortization expense related to intangible assets acquired through our business acquisitions of approximately $136 million, higher user acquisition costs and higher personnel-related expenses due to the ironSource Merger.

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 for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased as a result of our acquisition of ironSource, as well as an increase in acquisition-related expenses of approximately $27.0 million.

This increase was partially offset by a one-time charge of approximately $50.0 million for the termination of a future lease contract in 2021.

allocated overhead, and professional fees for external legal, accounting and other professional services.

We expect that our general and administrative expenses will increase in absolute dollars in the long term, as we scale to support the growth of our business but decrease in the short term as we reset our strategic portfolio.

We expect general and administrative expenses to fluctuate as a percentage of revenue from period to period.

General and administrative expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with the ironSource Merger, and to a lesser extent lease related expenses, partially offset by a decrease in professional fees.

Interest Expense

Interest expense consists primarily of interest expense associated with interest accrued on our convertible debt and our amortization of convertible debt issuance costs.

Interest expense for the year ended December 31, 2022 increased, compared to the comparable prior year period, due to our debt issuance costs amortization and interest accrued on our interest-bearing convertible debt issued in 2022.

Interest expense consists primarily of interest expense associated with our convertible debt and amortization of debt issuance costs.

Interest expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, due to accrued interest on our 2027 Notes and amortization of debt issuance costs.

Interest Income and Other Expense, Net

Interest income and other expense, net, consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, amortization of premium arising at acquisition of short-term investments, foreign currency remeasurement gains and losses, and foreign currency transaction gains and losses.

Interest income and other expense, net, consists primarily of interest income earned on our cash, cash equivalents, and short-term investments, foreign currency 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, for the year ended December 31, 2022 increased, compared to the comparable prior year period, primarily due to interest income earned on investments and time deposit accounts and amortization of premium related to investments.

Unity Software Inc.

Interest income and other expense, net, for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to rising interest rates increasing the interest and dividend income earned on our money market investments and time deposit accounts.

Provision for Income Taxes

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See Note 13, "Income Taxes," of the Notes to Consolidated Financial Statements.

Provision for income taxes for the year ended December 31, 2022 increased primarily due to the tax expense recognized as a result of a base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory research and development capitalization under the IRC Section 174.

Also, we maintained a valuation allowance against the deferred tax assets in the U.K.

Following our acquisition of ironSource, the Company undertook certain tax restructuring efforts as part of the integration of the acquired business.

As a result of the restructuring, we recognized $192.2 million of US federal and state deferred tax liabilities, which reduce our need for a valuation allowance in the U.S., except for timing differences that resulted in $11.6 million of income tax expense.

Provision for income taxes for the year ended December 31, 2023 decreased, compared to the comparable prior year period, primarily due to certain tax restructurings that affect our ongoing computation of qualifying foreign income, made during the year ended December 31, 2023.

Non-GAAP Financial Measures

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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.

In the future, we may also exclude non-recurring expenses and other expenses that do not reflect our overall operating results.

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.

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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.

In addition, we have used the non-GAAP financial measures below through fiscal year 2022.

In fiscal year 2023, we are preparing to replace non-GAAP gross profit, non-GAAP loss from operations, non-GAAP net loss, and non-GAAP net loss per share with adjusted gross profit and adjusted EBITDA.

Adjusted gross profit will be defined as gross profit excluding expenses associated with equity compensation, restructurings, depreciation, and amortization.

Adjusted EBITDA will be defined as net income or loss excluding benefits or expenses associated with equity compensation, acquisitions, restructurings, interest, taxes, depreciation, and amortization.

We expect to present, reconcile, and further define these measures in our first quarterly report on Form 10-Q in fiscal 2023.

Non-GAAP Gross Profit and Non-GAAP Loss from Operations

We define non-GAAP gross profit as gross profit excluding stock-based compensation expense, employer tax related to employee stock transactions, and amortization of acquired intangible assets expense and restructuring charges.

We define non-GAAP loss from operations as loss from operations excluding stock-based compensation expense, employer tax related to employee stock transactions, amortization of acquired intangible assets expense, costs incurred in connection with the formation of Unity China, acquisition-related cost, restructuring charges, legal settlement costs, and a one-time expense for the termination of a future lease agreement.

Beginning in the first quarter of 2023, we have replaced non-GAAP gross profit, non-GAAP loss from operations, non-GAAP net loss, and non-GAAP net loss per share with adjusted gross profit and adjusted EBITDA.

These measures have also been presented for the prior year period in a comparable manner.

Adjusted Gross Profit and Adjusted EBITDA

We define adjusted gross profit as GAAP gross profit excluding expenses associated with stock-based compensation, amortization of acquired intangible assets, depreciation, and restructurings and reorganizations.

We define adjusted EBITDA as net income or loss excluding benefits or expenses associated with stock-based compensation, amortization of acquired intangible assets, depreciation, acquisitions, restructurings and reorganizations, insurance reimbursement for legal expenses, interest, income tax, and other non-operating activities, which primarily consist of foreign exchange rate gains or losses.

We use adjusted gross profit and adjusted EBITDA in conjunction with traditional GAAP measures to evaluate our financial performance.

We believe that adjusted gross profit and adjusted EBITDA provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude expenses that we do not consider to be indicative of our overall operating performance.

Unity Software Inc.

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 provide our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as these metrics exclude expenses that 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.

Adjusted gross profit and adjusted EBITDA 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 plans, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

• non-GAAP gross profit and 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 gross profit and non-GAAP loss from operations does not reflect cash expenditure for such replacements;

• non-GAAP loss from operations excludes costs incurred in connection with the formation of Unity China;

• non-GAAP loss from operations excludes costs incurred from our acquisitions;

• non-GAAP gross profit and non-GAAP loss from operations excludes costs incurred from restructuring activities that we initiated during the year ended December 31, 2022;

• non-GAAP loss from operations excludes costs incurred from legal settlements that we anticipate recovering through insurance in a later period;

• non-GAAP loss from operations excludes expense for the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

• 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.

Unity Software Inc.

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):

• adjusted gross profit and adjusted EBITDA excludes the expense of amortization of acquired intangible assets and depreciation of property and equipment, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and adjusted gross profit and adjusted EBITDA does not reflect cash expenditure for such replacements;

• adjusted EBITDA excludes costs incurred from our acquisitions, and in connection with the formation of Unity China;

• adjusted gross profit and adjusted EBITDA excludes costs incurred from restructuring activities;

• adjusted EBITDA excludes costs incurred from legal settlements that we anticipate recovering through insurance, and subsequent recoveries of those amounts;

• the expenses and other items that we exclude in our calculation of adjusted gross profit and adjusted EBITDA 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.

The following table presents a reconciliation of our adjusted gross profit to our GAAP gross profit, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

GAAP gross profit $ 1,453,595 $ 948,524

Stock-based compensation expense 80,213 57,271

Employer tax related to employee stock transactions 2,587 5,434

Amortization of intangible assets expense 243,690 46,942

Restructuring charges 576 —

Non-GAAP gross profit $ 1,055,900 $ 889,415

Depreciation expense 10,480 6,397

Restructuring and reorganization costs 13,510 576

Adjusted gross profit $ 1,801,488 $ 1,059,710

GAAP gross margin 66 % 68 %

Non-GAAP gross margin 76 % 80 %

The year-over-year decrease in non-GAAP gross margin was primarily due to product mix of revenues, including a lower mix from Grow Solutions and an increase of personnel-related costs to support Professional Services and Weta Digital.

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):

GAAP loss from operations $ (882,213) $ (531,665)

Stock-based compensation expense 537,818 347,159

Employer tax related to employee stock transactions 19,859 50,574

Amortization of intangible assets expense 172,551 33,483

Costs incurred in connection with the formation of Unity China 6,138 —

Acquisition-related costs 41,465 14,803

Restructuring charges 11,008 —

Legal settlement costs 3,250 —

Lease termination expense — 49,795

Non-GAAP loss from operations $ (90,124) $ (35,851)

The year-over-year change in our non-GAAP loss from operations was primarily due to slower revenue growth, outpaced by our operating expenses, which were driven by an increase in headcount across the entire company to support investments in the business.

Unity Software Inc.

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, expenses associated with the termination of a future lease agreement, costs incurred in connection with the formation of Unity China, legal settlement costs, restructuring charges, and acquisition-related costs as well as the related tax effects of these items.

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.

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 plans, 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;

• they exclude costs incurred from restructuring activities that we initiated during the year ended December 31, 2022;

• they exclude costs incurred from legal settlement that we anticipate recovering through insurance in a later period;

• they exclude the expenses associated with the termination of a future lease agreement, although there is no guarantee that the company will not incur similar expenses in the future;

• they exclude the costs incurred in connection with the formation of Unity China;

• they exclude the costs incurred from our acquisitions;

• 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;

• 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 annual 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 years ended December 31, 2022, December 31, 2021, and December 31, 2020, the non-GAAP tax rate was (18%), (22)%, and (17)%, respectively.

Adjusted gross margin 82 % 76 %

Unity Software Inc.

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 ):

The following table presents a reconciliation of our adjusted EBITDA to net loss, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

GAAP net loss $ (826,322) $ (919,488)

Stock-based compensation expense 648,696 537,818

Employer tax related to employee stock transactions 19,859 50,574

Amortization of intangible assets expense 515,489 172,551

Costs incurred in connection with the formation of Unity China 6,138 —

Depreciation expense 48,427 39,025

Acquisition-related costs 888 41,465

Restructuring charges 11,008 —

Legal settlement costs 3,250 —

Lease termination expense — 49,795

Income tax effect of non-GAAP adjustments 21,254 (6,415)

Non-GAAP net loss $ (106,145) $ (43,208)

GAAP net loss per share attributable to our common stockholders, basic and diluted $ (2.96) $ (1.89)

Total impact on net loss per share, basic and diluted, from non-GAAP adjustments 2.62 1.73

Non-GAAP net loss per share attributable to our common stockholders, basic and diluted $ (0.34) $ (0.16)

Weighted-average common shares used in GAAP net loss per share computation, basic and diluted 310,504 282,195

Weighted-average common shares used in non-GAAP net loss per share computation, basic and diluted 310,504 282,195

Restructuring and reorganization costs 70,373 17,146

Insurance reimbursement for legal settlement (3,250) 3,250

Interest expense 24,580 7,404

Interest income and other expense, net (59,529) (7,192)

Income tax expense 28,477 37,063

Adjusted EBITDA $ 447,829 $ (70,958)

Free Cash Flow

We define free cash flow as net cash (used in) provided by operating activities less cash used for purchases of property and equipment.

We define free cash flow as net cash provided by (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.

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• 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.

Unity Software Inc.

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):

Net cash used in operating activities $ (59,431) $ (111,449)

The following table presents a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):

Net cash provided by (used in) operating activities $ 234,700 $ (59,431)

Purchases of property and equipment (55,921) (57,138)

Free cash flow $ 178,779 $ (116,569)

The year-over-year improvement in free cash flow was primarily due to the receipt of four years of license fees of approximately $200.0 million from Weta FX, which was connected to the acquisition of certain assets from Weta Digital, partially offset by the payment in 2022 of the corporate bonus for the year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows.

Net cash provided by investing activities $ 44,040 $ 723,228

Net cash used in financing activities $ (174,015) $ (226,634)

Unity Software Inc.

Liquidity and Capital Resources

As of December 31, 2022, our principal sources of liquidity were cash, cash equivalents, and short-term investments totaling $1.6 billion, which were primarily held for working capital purposes.

Our cash equivalents and short-term investments are invested primarily in fixed income securities, including government and investment-grade debt securities and money market funds.

As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents totaling $1.6 billion, which were primarily held for working capital purposes.

Our cash equivalents are invested primarily in government money market funds.

Our material cash requirements from known contractual and other obligations consists of our convertible notes, obligations under operating leases for office space, and contractual obligations for hosting services to support our business operations.

See Item 8 of Part II, "Financial Statements and Supplementary Data — Note 10 — Commitments and Contingencies" for additional discussion of our principal contractual commitments.

In July 2022, our board of directors approved our Share Repurchase Program, which authorized the repurchase of up to $2.5 billion of shares of our common stock in open market transactions through November 2024.

As of December 31, 2022, $1.0 billion remains available for future share repurchases under this program.

In connection with the ironSource Merger in November 2022, we issued $1.0 billion in aggregate amount of 2.0% convertible notes due 2027 (the "2027 Notes"), the proceeds of which were used to fund repurchases under our share repurchase program.

We previously issued $1.7 billion in aggregate principal amount of 0% convertible senior notes due 2027 in November 2021 (together with the 2027 Notes, the "Notes").

See Note 9, "Borrowings," of the Notes to Consolidated Financial Statements.

In connection with the ironSource Merger in November 2022, we issued $1.0 billion in aggregate principal amount of 2.0% convertible senior notes due 2027, the proceeds of which were used to fund repurchases under our share repurchase program.

We previously issued $1.7 billion in aggregate principal amount of 0% convertible senior notes due 2026 in November 2021.

See Note 9, "Borrowings," for additional discussion of the Notes.

In July 2022, our board of directors approved our share repurchase program, which authorized the repurchase of up to $2.5 billion of shares of our common stock in open market transactions through November 2024 (the "Share Repurchase Program").

As of December 31, 2023, $750 million remains available for future share repurchases under this program.

Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $3.1 billion as of December 31, 2023.

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As a result, we may require additional capital to execute our strategic initiatives to grow our business.

Unity Software Inc.

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.

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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.

In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary offerings, 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.

In addition, depending on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors, we may also from time to time seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all, including as a result of macroeconomic conditions such as rising interest rates and volatility in the capital market.

If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all, including as a result of macroeconomic conditions such as high interest rates, volatility in the capital markets and liquidity concerns at, or failures of, banks and other financial institutions.

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.

Unity Software Inc.

Our changes in cash flows were as follows (in thousands):

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Net change in cash, cash equivalents, and restricted cash $ 98,579 $ 439,089 $ (227,348)

Cash Used in Operating Activities

During the year ended December 31, 2022 , net cash used in operating activities was primarily due to payment in 2022 of the corporate bonus for our fiscal year ended December 31, 2021, our net loss, prepayments of software licenses, and an increase in working capital as our business grows, partially offset by the receipt of the prepayment of four years of license fees connected to the acquisition of certain assets from Weta Digital.

Our cash flows fluctuate from period to period due to revenue seasonality, timi ng of billings, collections, and publisher payments.

Cash Provided by Operating Activities

During the year ended December 31, 2023, net cash provided by operating activities was primarily due to the acquisition and inclusion of operating cash flows from ironSource, and an increase in working capital as our business grows.

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 Provided by Investing Activities

During the year ended December 31, 2022 , net cash provided by investing activities was primarily due to sales of short-term investments offset by cash used in acquisitions, non-marketable investments, and capital expenditures.

During the year ended December 31, 2023, net cash provided by investing activities consisted primarily of proceeds received from the maturities of short-term investments, which was partially offset by purchases of property and equipment.

Cash Used in Financing Activities

During the year ended December 31, 2022, net cash used in financing activities consisted of cash used to repurchase and retire common stock, partially offset by net proceeds from the issuance of the 2027 Notes, capital contributions from non-controlling interest holders, and proceeds from the issuance of common stock under our employee equity plans.

Unity Software Inc.

During the year ended December 31, 2023, net cash used in financing activities consisted of repurchases and retirement of common stock, offset by the proceeds from the issuance of common stock under our employee equity plans.

Critical Accounting Policies and Estimates

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The critical accounting estimates, assumptions and judgements that we believe have the most significant impact on our consolidated financial statements are described below.

Re venue Recognition

Revenue Recognition

Subscriptions to our Create Solutions provide customers with software, embedded cloud functionality, and software updates.

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We consider the embedded cloud functionality to be a separate performance obligation, however, its pattern of performance aligns with the software and software updates, which enables us to treat the subscription agreements as one performance obligation that is recognized ratably over the term of the agreement.

Unity Software Inc.

When contracts contain multiple element performance obligations, an allocation of the transaction price to each performance obligation is done based on a relative stand-alone selling price ("SSP").

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Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Unity Software Inc.

We are subject to income taxes in the United States and numerous foreign jurisdictions.

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We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate.

To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results.

To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in

Unity Software Inc.

which such determination is made and could have a material impact on our financial condition and operating results.

We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statement of operations.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis