What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-08-06 compared with 2025-05-07 · 67 added, 55 removed, 216 unchanged (36% of the section changed)

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Recent Developments in Our Business

In the three months ended March 31, 2025, we had reductions to our workforce and our office footprint, that resulted in approximately $14 million in employee separation costs, and $6 million of non-employee charges associated with these reductions.

In the six months ended June 30, 2025, we had reductions to our workforce and our office footprint, that resulted in approximately $20 million in employee separation costs, and $11 million of non-employee charges associated with these reductions.

We are continuing to evaluate our facility needs and expect more changes in the remainder of 2025.

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Customers Contributing More Than $100,000 of Revenue

We had 1,260 and 1,243 customers contributing more than $100,000 of revenue in the trailing 12 months as of March 31, 2025 and 2024, respectively.

We had 1,270 and 1,254 customers contributing more than $100,000 of revenue in the trailing 12 months as of June 30, 2025 and 2024, respectively.

The year over year increase was largely a result of our subscriptions growth.

While these customers represented the substantial majority of revenue for the three months ended March 31, 2025 and 2024, respectively, no one customer accounted for more than 10% of our revenue for either period.

While these customers represented the substantial majority of revenue for the six months ended June 30, 2025 and 2024, respectively, no one customer accounted for more than 10% of our revenue for either period.

Dollar-Based Net Expansion Rate

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Unity Software Inc.

March 31, 2025 March 31, 2024

June 30, 2025 June 30, 2024

Dollar-based net expansion rate 100 % 96 %

Our dollar-based net expansion rate as of March 31, 2025 was driven primarily by decreases in Grow Solutions revenue, due to competition in the advertising market, and to a lesser extent decreases in professional services revenue within Create Solutions, offset by growth in subscriptions revenue.

Our dollar-based net expansion rate as of March 31, 2024 was driven primarily by 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 period, is attributable to declines in Grow Solutions, and professional services revenue, as noted above.

The chart below illustrates that our dollar-based net expansion rate has been declining over the last year.

Our dollar-based net expansion rate as of June 30, 2025 and 2024 was driven primarily by decreases in Grow Solutions revenue, due to competition in the advertising market, offset by growth in subscriptions revenue.

The increase in dollar-based net expansion rate, compared to the comparable prior year period, is attributable to reduced declines in Grow Solutions revenue, as noted above.

The chart below illustrates that our dollar-based net expansion rate has been increasing over the last year.

Unity Software Inc.

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The following table summarizes our consolidated statements of operations data for the periods indicated (in thousands):

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2025 2024 2025 2024

Revenue $ 440,944 $ 449,259 $ 875,944 $ 909,639

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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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

2025 2024 2025 2024

Revenue 100 % 100 % 100 % 100 %

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

Three Months Ended

Three Months Ended Six Months Ended

June 30, June 30,

2025 2024 2025 2024

Create Solutions 153,782 150,777 304,160 314,447

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Total revenue $ 440,944 $ 449,259 $ 875,944 $ 909,639

Included in revenue in the first quarter of 2024 and 2025, are approximately $34 million and $17 million, respectively, of revenue associated with non-strategic portfolio, primarily in Create Solutions.

Included in revenue in the six months ended June 30, 2025 and 2024, are approximately $20 million and $58 million, respectively, of revenue associated with non-strategic portfolio, primarily in Create Solutions.

We expect that these amounts will decline further through the remainder of 2025.

Total revenue decreased in the three months ended March 31, 2025, compared to the comparable prior year period, primarily due to a decrease in Create Solutions revenue, driven by a decrease in professional services revenue, and in consumption services revenue, partially offset by increases in subscription revenue.

The decrease in total revenue was further driven by a decrease in Grow Solutions revenue driven by changes in customer demand, competition, and resource allocation decisions.

To improve the performance of Grow Solutions, in the first quarter of 2025, we started migrating a portion of our traffic to our new AI Platform, which we call “Unity Vector”.

While we expect related revenue to improve as Unity Vector is implemented, this may be partially or fully offset by declines in select areas of the business that do not utilize Unity Vector.

Total revenue decreased in the three and six months ended June 30, 2025, compared to the comparable prior year periods, primarily due to a decrease in Grow Solutions revenue driven by changes in customer demand, competition, and resource allocation decisions.

To improve the performance of Grow Solutions, in the first and second quarter of 2025, we migrated one of our ad networks (the "Unity Ad Network") to our new AI Platform, which we call "Unity Vector".

These changes contributed to the Unity Ad Network growing 15% from the three months ended March 31, 2025 to the three months ended June 30, 2025, and now represents 49% of total Grow Solutions revenue for the three months ended June 30, 2025.

The decrease in total revenue for the three and six months ended June 30, 2025, was further impacted by changes in Create Solutions revenue, including decreases in professional services revenue, and decreases in consumption services revenue, which were offset by an increase from the sale of a term license for approximately $12 million in the second quarter of 2025, and increases in subscription revenue.

Cost of Revenue, Gross Profit, and Gross Margin

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, hosting expenses, and the amortization of intangible assets.

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 fluctuate in the short term as we stabilize our business following our reset efforts.

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

We expect our gross profit to increase in absolute dollars in the long term but fluctuate in

Unity Software Inc.

Cost of revenue for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel costs, driven by our reductions in headcount.

the short term as we stabilize our business following our reset efforts.

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

Cost of revenue for the three months ended June 30, 2025 increased, compared to the comparable prior year period, primarily due to an increase in personnel costs, driven by the timing of merit increases in each year, and hosting expenses to operate our advertising networks.

Cost of revenue for the six months ended June 30, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel costs, driven by our reductions in headcount.

Operating Expenses

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In January 2024, we committed to a plan to eliminate approximately 25% of our workforce, and we mutually agreed to the departure of the founders of ironSource Ltd.

Following these announcements and substantially in the first quarter of 2024, we incurred incremental employee separation costs of approximately $193 million in the three months ended March 31, 2024, largely driven by the acceleration and modification of equity awards, including $15 million within cost of revenue, $43 million within research and development expense, $47 million within sales and marketing expense, and $88 million within general and administrative expense.

Following these announcements and substantially in the first quarter of 2024, we incurred incremental employee separation costs of approximately $201 million in the six months ended June 30, 2024, largely driven by the acceleration and modification of equity awards, including $15 million within cost of revenue, $44 million within research and development expense, $52 million within sales and marketing expense, and $90 million within general and administrative expense.

In addition, we incurred approximately $38 million of non-employee charges associated with this restructuring in 2024, largely within research and development expense.

Further, in the first quarter of 2025 we had additional workforce reductions.

In the three months ended March 31, 2025, we incurred incremental employee separation costs related to these actions of approximately $14 million, primarily within research and development, and sales and marketing.

In the six months ended June 30, 2025, we incurred incremental employee separation costs related to these actions of approximately $20 million, primarily within research and development, and sales and marketing.

In addition, we incurred approximately $11 million of non-employee charges associated with this restructuring in 2025.

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

Research and development expense for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel costs driven by our reductions in headcount.

Research and development expense for the three months ended June 30, 2025 increased, compared to the comparable prior year period, primarily due to an increase in personnel costs driven by increased costs to attract and retain talent.

Research and development expense for the six months ended June 30, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel costs driven by our reductions in headcount.

Sales and Marketing

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

Sales and marketing expense for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel costs, driven by our reductions in headcount.

Unity Software Inc.

Sales and marketing expense for the three and six months ended June 30, 2025 decreased, compared to the comparable prior year periods, primarily due to a decrease in personnel costs, driven by our reductions in headcount.

General and Administrative

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

We expect that our general and administrative

Unity Software Inc.

expenses will increase in absolute dollars in the long term, as we scale to support the growth of our business.

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.

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

General and administrative expense for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, primarily due to a decrease in personnel-related costs, driven by our reductions in headcount.

General and administrative expense for the three and six months ended June 30, 2025 decreased, compared to the comparable prior year periods, primarily due to decreases in personnel-related costs and in impairments of operating lease assets, both driven by incremental employee separation costs and non-employee charges from restructuring in 2024.

Interest Expense

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

Interest expense for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, due to a reduction in the amortization of debt issuance costs, driven by the repurchase of the 2026 Notes, partially offset by the amortization of new debt issuance costs, from the issuance of the 2030 Notes.

Interest expense for the three and six months ended June 30, 2025 increased, compared to the comparable prior year periods, due to the amortization of new debt issuance costs, from the issuance of the 2030 notes, partially offset by a reduction in the amortization of debt issuance costs, driven by the repurchase of the 2026 notes.

Interest Income and Other Income (Expense), Net

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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 income (expense), net, for the three months ended March 31, 2025 decreased, compared to the comparable prior year period, primarily due to changes in the amount of gain recognized from the repurchase of convertible debt.

Interest income and other income (expense), net, for the three months ended June 30, 2025 increased, compared to the comparable prior year period, primarily due to gains from foreign exchange.

Interest income and other income (expense), net, for the six months ended June 30, 2025 decreased, compared to the comparable prior year period, primarily due to changes in the amount of gain recognized from the repurchase of convertible debt.

In the first quarter of 2024, we recognized $61.4 million of gain on repurchase of convertible debt, compared to $42.7 million in the first quarter of 2025.

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See Note 9, "Income Taxes," of the Notes to Condensed Consolidated Financial Statements.

Provision for income taxes for the three months ended March 31, 2025 increased, compared to the comparable prior year period, primarily due to the tax benefit from restructuring efforts undertaken in the first quarter of 2024 that enhanced our ability to offset deferred tax liabilities in the U.S.

Provision for income taxes for the three and six months ended June 30, 2025 increased, compared to the comparable prior year period, primarily due to the tax benefit from restructuring efforts undertaken in the first quarter of 2024 that enhanced our ability to offset deferred tax liabilities in the U.S.

in future periods, thereby partially reducing the need for a valuation allowance.

On July 4, 2025, the United States enacted new tax reform legislation.

Included in this legislation are provisions that allow for the immediate expensing of domestic United States research and

Unity Software Inc.

development expenses, immediate expensing of certain capital expenditures, and other changes to the U.S.

taxation of profits derived from foreign operations.

As a result of the enactment of the legislation, the Company expects a decrease in the tax expense during the third and fourth quarters of 2025.

The Company continues to evaluate the impact the new legislation will have on the Consolidated Financial Statements.

While this assessment is ongoing, the Company does not expect the new legislation to have a material impact on the Consolidated Financial Statements.

Non-GAAP Financial Measures

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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

Unity Software Inc.

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.

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We believe that adjusted gross profit, adjusted EBITDA, and adjusted EPS 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.

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):

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Adjusted gross margin 83 % 84 %

Unity Software Inc.

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):

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Interest income and other income (expense), net (19,837) (10,457)

Provision for (benefit from) Income taxes 2,192 (12,843)

Provision for Income taxes 2,420 946

Adjusted EBITDA $ 90,497 $ 113,469

Unity Software Inc.

The following table presents a reconciliation of adjusted EPS to diluted net loss per share attributable to Unity Software Inc., the most directly comparable measures as determined in accordance with GAAP, for the periods presented (in thousands):

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Non-GAAP weighted-average common shares used in adjusted EPS 448,423 432,530

Unity Software Inc.

Three Months Ended

GAAP diluted net loss per share attributable to Unity Software Inc.

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Free Cash Flow

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

We define free cash flow as net cash provided by 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.

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):

Three Months Ended March 31,

Net cash provided by (used in) operating activities $ 13,026 $ (7,373)

Unity Software Inc.

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

Six Months Ended June 30,

Net cash provided by operating activities $ 146,122 $ 81,003

Purchases of property and equipment (12,164) (15,956)

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Liquidity and Capital Resources

As of March 31, 2025, our principal sources of liquidity were cash and cash equivalents totaling $1.5 billion, which were primarily held for working capital purposes.

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

As of June 30, 2025, our principal sources of liquidity were cash and cash equivalents totaling $1.7 billion, which were primarily held for working capital purposes.

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

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

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See Part I, Item I, Note 6, "Borrowings" for additional discussion of the Notes.

Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $3.8 billion as of March 31, 2025.

We expect to continue to incur operating losses on a GAAP basis for the foreseeable future due to the investments we will continue to make in research and

Unity Software Inc.

development, sales and marketing, and general and administrative.

Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $3.9 billion as of June 30, 2025.

We expect to continue to incur operating losses on a GAAP basis 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.

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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 high interest rates, volatility in the capital markets and liquidity concerns at, or failures of, banks and other financial institutions.

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

Unity Software Inc.

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.

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

Three Months Ended March 31,

Net cash provided by (used in) operating activities $ 13,026 $ (7,373)

Six Months Ended June 30,

Net cash provided by operating activities $ 146,122 $ 81,003

Net cash used in investing activities (14,164) (16,316)

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Cash Provided by Operating Activities

During the three months ended March 31, 2025, net cash provided by operating activities was primarily due to a decrease in our net loss, adjusted for certain non-cash items, which include depreciation and amortization, stock-based compensation, gain on convertible notes, impairments, and other, offset by a decrease in operating assets and liabilities.

During the six months ended June 30, 2025, net cash provided by operating activities was primarily due to a decrease in our net loss, adjusted for certain non-cash items, which include depreciation and amortization, stock-based compensation, gain on convertible notes, impairments, and other, offset by a decrease in operating assets and liabilities.

Our cash flows can fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments, and historical cash flows are not necessarily indicative of our results in any future period.

Cash Used in Investing Activities

During the three months ended March 31, 2025, net cash used in investing activities consisted primarily of purchases of property and equipment.

During the six months ended June 30, 2025, net cash used in investing activities consisted primarily of purchases of property and equipment and purchases of non-marketable investments.

Cash Provided by Financing Activities

During the three months ended March 31, 2025, net cash provided by financing activities consisted of proceeds from issuance of convertible notes, and the issuance of common stock under our employee equity plans, offset by repayments of convertible notes and the purchase of capped calls.

Unity Software Inc.

During the six months ended June 30, 2025, net cash provided by financing activities consisted of proceeds from issuance of convertible notes, and the issuance of common stock under our employee equity plans, offset by repayments of convertible notes and the purchase of capped calls.

Critical Accounting Policies and Estimates

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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 ended December 31, 2024, filed with the SEC on February 21, 2025.

Unity Software Inc.

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-Q

Item 2. Management’s Discussion and Analysis