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Unity Software Inc(U-N)
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Unity (NYSE:U) Reports Sales Below Analyst Estimates In Q3 Earnings, Stock Drops 13.2%

StockStory - Thu Nov 9, 2023

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Game engine maker Unity (NYSE:U) missed analysts' expectations in Q3 FY2023, with revenue up 68.5% year on year to $544.2 million. Turning to EPS, Unity made a GAAP loss of $0.32 per share, improving from its loss of $0.84 per share in the same quarter last year.

Is now the time to buy Unity? Find out by accessing our full research report, it's free.

Unity (U) Q3 FY2023 Highlights:

  • Revenue: $544.2 million vs analyst estimates of $549.4 million (0.9% miss)
  • EPS: -$0.32 vs analyst estimates of -$0.49 (34.4% beat)
  • Guidance not given (quarterly and full year guidance was provided last quarter)
  • Free Cash Flow of $104 million, up from $33.53 million in the previous quarter
  • Gross Margin (GAAP): 72.2%, up from 65.5% in the same quarter last year

Despite giving full year guidance just last quarter, Unity opted this quarter to stop giving financial guidance. "Several weeks ago, we started a comprehensive assessment of our product portfolio to focus on those products that are most valuable to our customers. We are also evaluating the right cost structure that aligns with the more focused portfolio...We are therefore not providing guidance for the fourth quarter or the full year 2023. We will provide guidance for 2024 with our fourth quarter and full year 2023 results. At that time, we will also share more details on our operational interventions, which are expected to gradually improve our results."

Started as a game studio by three friends in a Copenhagen apartment, Unity (NYSE:U) is a software as a service platform that makes it easier to develop and monetize new games and other visual digital experiences.

Design Software

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Sales Growth

As you can see below, Unity's revenue growth has been impressive over the last two years, growing from $286.3 million in Q3 FY2021 to $544.2 million this quarter.

Unity Total Revenue

Although this quarter fell short of analysts' lofty expectations, Unity's revenue growth was still very strong, up a rather splendid 68.5% year on year. Its growth did slow down compared to last quarter, however, as the revenue increased by just $10.73 million in Q3 compared to $33.12 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Looking ahead, analysts covering the company were expecting sales to grow 22.7% over the next 12 months before the earnings results announcement.

The pandemic fundamentally changed several consumer habits. There is a founder-led company that is massively benefiting from this shift. The business has grown astonishingly fast, with 40%+ free cash flow margins. Its fundamentals are undoubtedly best-in-class. Still, the total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Key Takeaways from Unity's Q3 Results

Sporting a market capitalization of $9.99 billion, Unity is among smaller companies, but its more than $1.51 billion in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

While revenue unfortunately missed analysts' expectations, adjusted EBITDA beat. The major negative, however, was that the company stopped providing financial guidance. Management said that "Several weeks ago, we started a comprehensive assessment of our product portfolio to focus on those products that are most valuable to our customers. We are also evaluating the right cost structure that aligns with the more focused portfolio. We are acting quickly and expect to make final decisions over the next few weeks. We expect to start implementing the plan within this quarter and expect to complete all interventions before the end of the first quarter of 2024. This will likely include discontinuing certain product offerings, reducing our workforce, and reducing our office footprint...The exact timing of these interventions is difficult to estimate. We are therefore not providing guidance for the fourth quarter or the full year 2023. We will provide guidance for 2024 with our fourth quarter and full year 2023 results. At that time, we will also share more details on our operational interventions, which are expected to gradually improve our results."

As a reminder, Unity made an attempt to raise prices that developers pay the platform a few months ago. This resulted in backlash from developers and other stakeholders and subsequently resulted in Unity backtracking. This quarter's announcement about a product portfolio refresh and other "interventions" may be spooking investors again and giving them deja vu. Overall, the results could have been better. The company is down 12.8% on the results and currently trades at $22 per share.

Unity may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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The author has no position in any of the stocks mentioned in this report.