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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 001-39497
UNITY SOFTWARE INC.
(Exact name of registrant as specified in its charter)
Delaware27-0334803
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
30 3rd Street
San Francisco, California 94103‑3104
(Address, including zip code, of principal executive offices)
(415) 539‑3162
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common stock, $0.000005 par valueUThe New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filerAccelerated filer
Nonaccelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes No x
As of April 28, 2023, there were 378,657,537 shares of the registrant’s common stock outstanding.



UNITY SOFTWARE INC.
FORM 10‑Q
For the Quarter Ended March 31, 2023
TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.




NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
This Quarterly Report on Form 10‑Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical fact, including statements regarding our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as "aim," "anticipate," "believe," "contemplate," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "target," "toward," "will," "would," or the negative of these words or other similar terms or expressions.
You should not rely on forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10‑Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, and operating results. Readers are cautioned that these forward‑looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified and discussed in greater detail below, under "Part II, Item 1A. Risk Factors" and summarized below.
We have a history of losses and may not achieve or sustain profitability on a GAAP basis in the future.
The impact of macroeconomic conditions, such as inflation and actions taken by central banks to counter inflation, liquidity concerns at, and failures of, banks and other financial institutions, and potential economic recession, on our business, as well as our customers, prospects, partners, and service providers.

We have a limited history operating our business at its current scale, including with ironSource, and as a result, our past results may not be indicative of future operating performance.
If we are unable to retain our existing customers–including ironSource customers–and expand their use of our platform, or attract new customers, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
The markets in which we participate are competitive, and if we do not compete effectively, our business, financial condition, and results of operations could be harmed.
Operating system platform providers or application stores may change terms of service, policies or technical requirements applicable to us or our customers, which could adversely impact our business.
If we are unable to further expand into new industries, or if our solutions for any new industry fail to achieve market acceptance, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our business relies in part on strategic relationships. If we are unable to maintain favorable terms and conditions and business relations with respect to our strategic relationships, our business could be harmed.
Our core value of putting our users first may cause us to forgo short-term gains and may not lead to the long-term benefits we expect.
If we do not make our platform, including new versions or technology advancements, easier to use or properly train customers on how to use our platform, our ability to broaden the appeal of our platform and solutions and to increase our revenue could suffer.



Interruptions, performance problems, or defects associated with our platform may adversely affect our business, financial condition, and results of operations.
The results, events, and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Quarterly Report on Form 10‑Q. While we believe such information provides a reasonable basis for these statements, such information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
The forward-looking statements made in this Quarterly Report on Form 10‑Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10‑Q or to reflect new information, actual results, revised expectations, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments.
Additional Information
Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to "we," "us," "our," "our company," "Unity," and "Unity Technologies" refer to Unity Software Inc. and its consolidated subsidiaries. The Unity design logos, "Unity" and our other registered or common law trademarks, service marks, or trade names appearing in this Quarterly Report on Form 10-Q are the property of Unity Software Inc. or its affiliates.
Investors and others should note that we may announce material business and financial information using our investor relations website (www.investors.unity.com), our filings with the Securities and Exchange Commission, press releases, public conference calls, and public webcasts as means of complying with our disclosure obligations under Regulation FD. We encourage investors and others interested in our company to review the information that we make available.


Unity Software Inc.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
As of
March 31, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$1,593,946 $1,485,084 
Short-term investments 101,711 
Accounts receivable, net612,763 633,775 
Prepaid expenses and other136,653 144,070 
Total current assets2,343,362 2,364,640 
Property and equipment, net129,050 121,863 
Goodwill3,200,955 3,200,955 
Intangible assets, net1,824,313 1,922,234 
Other assets237,053 224,293 
Total assets$7,734,733 $7,833,985 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$28,222 $20,221 
Accrued expenses and other321,234 326,339 
Publisher payables417,866 445,622 
Deferred revenue212,925 218,102 
Total current liabilities980,247 1,010,284 
Convertible notes2,708,300 2,707,171 
Long-term deferred revenue90,407 103,442 
Other long-term liabilities264,107 258,959 
Total liabilities4,043,061 4,079,856 
Commitments and contingencies (Note 7)
Redeemable noncontrolling interests225,376 219,563 
Unity Software Inc. Stockholders’ equity:
Common stock, $0.000005 par value:
Authorized shares - 1,000,000 and 1,000,000
Issued and outstanding shares - 378,374 and 374,243
2 2 
Additional paid-in capital5,962,358 5,779,776 
Accumulated other comprehensive income (loss)490 (1,691)
Accumulated deficit(2,502,850)(2,249,819)
Total Unity Software Inc. stockholders’ equity3,460,000 3,528,268 
Noncontrolling interest6,296 6,298 
Total liabilities and stockholders’ equity$7,734,733 $7,833,985 
See accompanying Notes to Condensed Consolidated Financial Statements.


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
20232022
Revenue$500,361 $320,126 
Cost of revenue161,964 93,833 
Gross profit338,397 226,293 
Operating expenses
Research and development280,480 221,040 
Sales and marketing216,127 103,939 
General and administrative96,774 72,475 
Total operating expenses593,381 397,454 
Loss from operations(254,984)(171,161)
Interest expense(6,129)(1,111)
Interest income and other expense, net13,615 941 
Loss before income taxes(247,498)(171,331)
Provision for Income taxes6,205 6,224 
Net loss(253,703)(177,555)
Net loss attributable to noncontrolling interest and redeemable noncontrolling interests(672) 
Net loss attributable to Unity Software Inc.$(253,031)$(177,555)
Basic and diluted net loss per share attributable to Unity Software Inc.$(0.67)$(0.60)
Weighted-average shares used in computation of basic and diluted net loss per share375,909 294,341 
See accompanying Notes to Condensed Consolidated Financial Statements.
2


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
20232022
Net loss$(253,703)$(177,555)
Other comprehensive income (loss), net of taxes:
Change in foreign currency translation adjustment3,157 19 
Change in unrealized losses on short-term investments (4,428)
Change in unrealized losses on derivative instruments(327) 
Other comprehensive income (loss)2,830 (4,409)
Comprehensive loss(250,873)(181,964)
Net loss attributable to noncontrolling interest and redeemable noncontrolling interests(672) 
Foreign currency translation attributable to noncontrolling interest and redeemable noncontrolling interests649  
Comprehensive loss attributable to noncontrolling interest and redeemable noncontrolling interests(23) 
Comprehensive loss attributable to Unity Software Inc.$(250,850)$(181,964)
See accompanying Notes to Condensed Consolidated Financial Statements.
3


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
Three Months Ended March 31, 2023
Accumulated
AdditionalOtherUnity Software Inc.
Common StockPaid-InComprehensiveAccumulatedStockholders'NoncontrollingTotal
SharesAmountCapitalIncome (Loss)DeficitEquity
Interest (1)
Equity
Balance at December 31, 2022374,243,196 $2 $5,779,776 $(1,691)$(2,249,819)$3,528,268 $6,298 $3,534,566 
Issuance of common stock from employee equity plans1,475,761 — 21,971 — — 21,971 — 21,971 
Issuance of common stock for settlement of RSUs2,654,728 — — — — — — — 
Stock‑based compensation expense— — 166,445 — — 166,445 — 166,445 
Net loss— — — — (253,031)(253,031)(46)(253,077)
Adjustments to redeemable noncontrolling interest— — (5,834)— — (5,834)— (5,834)
Other comprehensive income— — — 2,181 — 2,181 44 2,225 
Balance at March 31, 2023378,373,685 $2 $5,962,358 $490 $(2,502,850)$3,460,000 $6,296 $3,466,296 
Three Months Ended March 31, 2022
Accumulated
AdditionalOther
Unity Software Inc.
Common StockPaid-InComprehensiveAccumulatedStockholders'NoncontrollingTotal
SharesAmountCapitalLossDeficitEquity
Interest (1)
Equity
Balance at December 31, 2021292,592,356 $2 $3,729,874 $(3,858)$(1,331,627)$2,394,391 $ $2,394,391 
Issuance of common stock from employee equity plans2,160,044 — 30,216 — — 30,216 — 30,216 
Issuance of common stock for settlement of RSUs925,030 — — — — — — — 
Common stock issued in connection with acquisitions169,321 — 16,072 — — 16,072 — 16,072 
Stock‑based compensation expense— — 103,427 — — 103,427 — 103,427 
Net loss— — — — (177,555)(177,555)— (177,555)
Other comprehensive loss— — — (4,409)— (4,409)— (4,409)
Balance at March 31, 2022295,846,751 $2 $3,879,589 $(8,267)$(1,509,182)$2,362,142 $ $2,362,142 
.

(1) Excludes redeemable noncontrolling interests.
See accompanying Notes to Condensed Consolidated Financial Statements.
4


Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
20232022
Operating activities
Net loss$(253,703)$(177,555)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization109,560 41,472 
Stock-based compensation expense163,028 103,427 
Other379 3,260 
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net21,013 7,532 
Prepaid expenses and other7,589 (9,116)
Other assets11,169 4,868 
Accounts payable7,450 38 
Accrued expenses and other(7,305)(29,646)
Publisher payables(27,756)(23,780)
Other long-term liabilities(18,302)(8,614)
Deferred revenue(18,221)189,414 
Net cash provided by (used in) operating activities(5,099)101,300 
Investing activities
Purchases of short-term investments(212)(82,777)
Proceeds from principal repayments and maturities of short-term investments102,673 100,883 
Purchases of non-marketable investments (15,000)
Purchases of property and equipment(14,350)(14,929)
Business acquisitions, net of cash acquired (23,637)
Net cash provided by (used in) investing activities88,111 (35,460)
Financing activities
Proceeds from issuance of common stock from employee equity plans21,971 30,216 
Net cash provided by financing activities21,971 30,216 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash3,151 37 
Increase in cash, cash equivalents, and restricted cash108,134 96,093 
Cash and restricted cash, beginning of period1,505,688 1,066,599 
Cash, cash equivalents, and restricted cash, end of period$1,613,822 $1,162,692 
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net of refunds$3,751 $1,087 
Cash paid for operating leases$10,181 $5,863 
Supplemental disclosures of non‑cash investing and financing activities:
Fair value of common stock issued as consideration for business and asset acquisitions$ $16,072 
Assets acquired under operating lease$24,528 $9,372 
5


Unity Software Inc.
The below table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the total of the same amounts shown on the condensed consolidated statements of cash flows (in thousands):
As of March 31,
20232022
Cash and cash equivalents$1,593,946 $1,152,014 
Restricted cash, included in prepaid and other and other assets19,876 10,678 
Total cash, cash equivalents, and restricted cash$1,613,822 $1,162,692 
See accompanying Notes to Condensed Consolidated Financial Statements.
6


Unity Software Inc.
UNITY SOFTWARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Basis of Presentation and Consolidation
We prepared the accompanying unaudited condensed consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and applicable rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial reporting. The condensed consolidated financial statements include the accounts of Unity Software Inc., its wholly owned subsidiaries, and entities consolidated under the voting interest model. We have eliminated all intercompany balances and transactions. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In our opinion, all adjustments, which include normal recurring adjustments necessary for a fair presentation, have been included. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or other periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our 2022 Annual Report on Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material to our financial position and results of operations.
2. Revenue
The following table presents our revenue disaggregated by source, which also have similar economic characteristics (in thousands):
Three Months Ended March 31,
20232022
Create Solutions$187,369 $164,544 
Grow Solutions312,992 155,582 
Total revenue$500,361 $320,126 
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Unity Software Inc.
The following table presents our revenue disaggregated by geography, based on the invoice address of our customers (in thousands):
Three Months Ended March 31,
20232022
United States$130,901 $73,962 
Greater China (1)
47,512 43,841 
EMEA (2)
186,724 115,304 
APAC (3)
119,564 76,689 
Other Americas (4)
15,660 10,330 
Total revenue$500,361 $320,126 
(1)    Greater China includes China, Hong Kong, and Taiwan.
(2)    Europe, the Middle East, and Africa ("EMEA")
(3)    Asia-Pacific, excluding Greater China ("APAC")
(4)    Canada and Latin America ("Other Americas")
Accounts Receivable, Net
Accounts receivable are recorded at the original invoiced amount, net of allowances for uncollectible amounts. We estimate losses on uncollectible amounts based on expected losses, including our historical experience of actual losses. The estimated losses on uncollectible amounts are recorded in general and administrative expense on our condensed consolidated statement of operations. As of March 31, 2023 and December 31, 2022, the allowance for uncollectible amounts was $11.2 million and $9.4 million, respectively.
Sales Commissions
Sales commissions that have a benefit beyond one year are capitalized and amortized on a straight line method over the expected period of benefit, which is generally three years. As of March 31, 2023, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $8.1 million and $4.2 million, respectively. During the three months ended March 31, 2023, we recorded amortization costs of $2.5 million in sales and marketing expenses, as compared to $2.3 million during the three months ended March 31, 2022.
Contract Balances and Remaining Performance Obligations
Contract assets (unbilled receivables) included in accounts receivable, net, are recorded when revenue is earned in advance of customer billing schedules. Unbilled receivables totaled $35.6 million and $37.5 million as of March 31, 2023 and December 31, 2022, respectively.
Contract liabilities (deferred revenue) relate to payments received in advance of performance under the contract. Revenue recognized during the three months ended March 31, 2023 that was included in the deferred revenue balances at January 1, 2023 was $85.0 million.
Additionally, we have performance obligations associated with commitments in customer contracts to perform in the future that had not yet been recognized in our consolidated financial statements. For contracts with original terms that exceed one year, those commitments not yet recognized as of March 31, 2023, were $559.3 million and relate primarily to Create Solutions subscriptions, enterprise support, and strategic partnerships. These commitments generally extend over the next one to five years and we expect to recognize approximately $249.0 million or 45% of this revenue during the next 12 months.
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Unity Software Inc.
3. Financial Instruments
Restricted cash, cash equivalents, and short-term investments are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value.
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets or inputs that are observable for the assets or liabilities, either directly or indirectly through market corroboration.
Level 3—Valuations based on unobservable inputs reflecting our own assumptions used to measure assets and liabilities at fair value. These valuations require significant judgment.
The following table summarizes, by major security type, our restricted cash, cash equivalents, and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
March 31, 2023December 31, 2022
Amortized CostUnrealized GainsUnrealized LossesFair ValueFair Value
Level 1:
Restricted cash and cash equivalents:
Restricted cash$19,876 $— $— $19,876 $20,604 
Money market funds578,093 — — 578,093 373,619 
Time deposits471,280 — — 471,280 412,125 
Total restricted cash and cash equivalents$1,069,249 $— $— $1,069,249 $806,348 
Short-term investments
Short-term deposits$ $ $ $ $101,711 
Total short-term investments$ $ $ $ $101,711 
Nonrecurring Fair Value Measurements
We hold equity investments in certain unconsolidated entities without a readily determinable fair value. These strategic investments represent less than a 20% ownership interest in each of the entities, and we do not have significant influence over or control of the entities. We use the measurement alternative to account for adjustments to these investments for observable transactions for the same or similar investments of the same issuer in any given quarter. If we determine an impairment has occurred, the investment is written down to fair value. As of March 31, 2023 and December 31, 2022, such equity investments totaled $31.1 million. No adjustments to the carrying value of these equity investments were recorded for the three months ended March 31, 2023 and 2022.
4. Investment in Unity China
The results of Unity China, of which 20.5% is held by third-party investors, are included in our condensed consolidated financial statements and were not material for the three months ended March 31, 2023. Under certain conditions we may be required to repurchase the third-party interest in Unity China. The redeemable noncontrolling interests in Unity China are recorded as temporary equity on our condensed consolidated balance sheet.
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Unity Software Inc.
The following table presents the changes in redeemable noncontrolling interests (in thousands):
March 31, 2023
Balance at beginning of period$219,563 
Net loss attributable to redeemable noncontrolling interests(626)
Accretion for redeemable noncontrolling interests 2,698 
Foreign currency translation and foreign exchange adjustments for redeemable noncontrolling interests3,741 
Balance at end of period$225,376 
5. Leases
We have operating leases for offices, which have remaining lease terms of up to ten years.
Components of lease expense were as follows (in thousands):
Three Months Ended March 31,
20232022
Operating lease expense$9,393 $7,620 
Short-term lease expense478 270 
Variable lease expense1,278 1,445 
Sublease income(384) 
Total lease expense$10,765 $9,335 
Supplemental balance sheet information related to leases was as follows (in thousands, except weighted-average figures):
As of
ClassificationMarch 31, 2023December 31, 2022
Operating lease assetsOther assets$137,274 $120,535 
Current operating lease liabilitiesAccrued expenses and other$36,373 $34,469 
Long-term operating lease liabilitiesOther long-term liabilities121,766 107,776 
Total operating lease liabilities$158,139 $142,245 
As of March 31, 2023, our operating leases had a weighted-average remaining lease term of 5.5 years and a weighted-average discount rate of 4.8%. As of December 31, 2022, our operating leases had a weighted-average remaining lease term of five years and a weighted-average discount rate of 4.0%.
As of March 31, 2023, our lease liabilities were as follows (in thousands):
Operating Leases (1)
Gross lease liabilities$180,336 
Less: imputed interest(22,196)
Present value of lease liabilities$158,139 
(1)    Excludes future minimum payments for leases which have not yet commenced as of March 31, 2023.
As of March 31, 2023, we had entered into leases that have not yet commenced with future minimum lease payments of $14.0 million that are not yet reflected on our condensed consolidated balance sheet. These operating leases will commence in 2023 with lease terms of approximately two to five years.
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Unity Software Inc.
6. Borrowings
Convertible Notes
2027 Notes
In November 2022, we issued $1.0 billion in aggregate amount of 2.0% convertible notes due 2027 (the "2027 Notes"). The closing of the issuance and sale of the 2027 Notes (the "PIPE") occurred promptly following the closing of the transactions contemplated by the Agreement and Plan of Merger (the "Merger Agreement"), dated July 13, 2022, by and among Unity Software Inc., Ursa Aroma Merger Subsidiary Ltd., a company organized under the laws of the State of Israel and a direct wholly owned subsidiary of Unity, and ironSource Ltd., a company organized under the laws of the State of Israel ("ironSource", and such transactions, the "ironSource Merger"). The 2027 Notes were issued to certain affiliates of Silver Lake and Sequoia Capital (the “Purchasers”), pursuant to an indenture dated November 8, 2022 (the “Indenture”), in accordance with the Investment Agreement entered among the Company and certain affiliates of the Purchasers dated July 13, 2022 (the “Investment Agreement”). Proceeds from the issuance of the 2027 Notes were approximately $1.0 billion, net of debt issuance costs. The debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method.
The 2027 Notes are general unsecured obligations which bear regular interest of 2.0%. We may elect for additional interest to accrue on the 2027 Notes as the sole remedy for any failure by us to comply with certain reporting requirements under the Indenture. Holders of the 2027 Notes may receive additional interest under specified circumstances as outlined in the Indenture. Additional interest, if any, will be payable in the same manner as the regular interest, which is semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2023. The 2027 Notes will mature on November 15, 2027 unless earlier converted, redeemed, or repurchased.
The 2027 Notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election, at an initial conversion rate of 20.4526 shares of common stock per $1,000 principal amount of 2027 Notes, which is equivalent to an initial conversion price of approximately $48.89 per share of our common stock. The conversion rate is subject to customary adjustments for certain events as described in the Indenture governing the 2027 Notes. Pursuant to the Investment Agreement, the Purchasers are restricted from converting the 2027 Notes prior to the earlier of (i) twelve months after the date of issuance and (ii) the consummation of a change of control of our company or entry into a definitive agreement for a transaction that, if consummated, would result in a change of control, subject to certain exceptions.
In connection with a make-whole fundamental change, as defined in the Indenture, or in connection with certain corporate events that occur prior to the maturity date or a notice of redemption, in each case as described in the Indentures, we will increase the conversion rate for a holder of the 2027 Notes who elects to convert its 2027 Notes in connection with such a corporate event or during the related redemption period in certain circumstances. Additionally, in the event of a fundamental change, subject to certain limitations described in the Indenture, holders of the 2027 Notes may require us to repurchase all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of 2027 Notes to be repurchased, plus any accrued and unpaid additional interest, if any, to, but excluding, the fundamental change repurchase date.
We accounted for the issuance of the 2027 Notes as a single liability measured at its amortized cost, as no other embedded features require bifurcation and recognition as derivatives.
Interest expense on the 2027 Notes related to regular interest and the amortization of debt issuance costs was $5.0 million for the three months ended March 31, 2023.
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Unity Software Inc.
2026 Notes
In November 2021, we issued an aggregate of $1.7 billion principal amount of 0% Convertible Senior Notes due 2026 (the "2026 Notes"). Proceeds from the issuance of the 2026 Notes were $1.7 billion, net of debt issuance costs and cash used to purchase the capped call transactions ("Capped Call Transactions") discussed below. The debt issuance costs are amortized to interest expense using the straight-line method, which approximates the effective interest method.
The 2026 Notes are general unsecured obligations which do not bear regular interest and for which the principal balance will not accrete. The 2026 Notes will mature on November 15, 2026 unless earlier converted, redeemed, or repurchased.
The 2026 Notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election, at an initial conversion rate of 3.2392 shares of common stock per $1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately $308.72 per share of our common stock. The conversion rate is subject to customary adjustments for certain events as described in the indenture governing the 2026 Notes.
Interest expense on the 2026 Notes related to the amortization of debt issuance costs was $1.1 million for the three months ended March 31, 2023.
The table below summarizes the principal and unamortized debt issuance costs for the 2026 and 2027 Notes (in thousands):
As of
March 31, 2023
Convertible notes:
Principal - 2026 Notes$1,725,000 
Principal - 2027 Notes1,000,000 
Unamortized debt issuance cost - 2026 and 2027 Notes(16,700)
Net carrying amount$2,708,300 
As of March 31, 2023, no holders of the 2027 and 2026 Notes have exercised the conversion rights, and the if-converted value of the 2027 and 2026 Notes did not exceed the principal amount.
Capped Call Transactions
In connection with the pricing of the 2026 Notes, we entered into the Capped Call Transactions with certain counterparties at a net cost of $48.1 million with call options totaling approximately 5.6 million of our common shares, and expiration dates beginning on September 18, 2026 and ending on November 12, 2026. The strike price of the Capped Call Transactions is $308.72, and the cap price is initially $343.02 per share of our common stock and is subject to certain adjustments under the terms of the Capped Call Transactions. The Capped Call Transactions are freestanding and are considered separately exercisable from the 2026 Notes.
The Capped Call Transactions are intended to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted 2026 Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price described above. The cost of the Capped Call Transactions was recorded as a reduction of our additional paid-in capital on our consolidated balance sheets. The Capped Call Transactions will not be remeasured as long as they continue to meet the conditions for equity classification. As of March 31, 2023, the Capped Call Transactions were not in the money and met the conditions for equity classification.
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Table of Contents
Unity Software Inc.
7. Commitments and Contingencies
The following table summarizes our non-cancelable contractual commitments as of March 31, 2023 (in thousands):
TotalRemainder of 20232024‑20252026‑2027Thereafter
Operating leases (1)
$194,358 $33,570 $78,823 $43,424 $38,541 
Purchase commitments (2)
883,053 186,666 477,510 218,877  
Convertible notes (3)
2,725,000   2,725,000  
Total$3,802,411 $220,236 $556,333 $2,987,301 $38,541 
(1)    Operating leases consist of obligations for real estate that are active and those that have not yet commenced.
)2)    The substantial majority of our purchase commitments are related to agreements with our data center hosting providers.
(3)    Convertible notes due 2026 and 2027. See Note 6, "Borrowings," of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion.
We expect to meet our remaining commitment.
Legal Matters
In the normal course of business, we are subject to various legal matters. We accrue a liability when management believes both that it is probable that a liability has been incurred and that the amount of loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Legal costs related to such potential losses are expensed as incurred. In addition, recoveries are shown as a reduction in legal costs in the period in which they are realized. With respect to our outstanding matters, based on our current knowledge, we believe that the resolution of such matters will not, either individually or in aggregate, have a material adverse effect on our business or our condensed consolidated financial statements. However, litigation is inherently uncertain, and the outcome of these matters cannot be predicted with certainty. Accordingly, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these matters.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, investors, directors, officers, employees and other parties with respect to certain matters. Indemnification may include losses from our breach of such agreements, services we provide, or third-party intellectual property infringement claims. These indemnifications may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments may not be subject to a cap. As of March 31, 2023, there were no known events or circumstances that have resulted in a material indemnification liability to us and we did not incur material costs to defend lawsuits or settle claims related to these indemnifications.
Letters of Credit
We had $19.9 million of secured letters of credit outstanding as of March 31, 2023 and December 31, 2022. These primarily relate to our office space leases and are fully collateralized by certificates of deposit which we record in restricted cash on our condensed consolidated balance sheets.
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Unity Software Inc.
8. Stock‑Based Compensation
We recorded stock-based compensation expense related to grants to employees on our condensed consolidated statements of operations as follows (in thousands):
Three Months Ended March 31,
20232022
Cost of revenue$18,849 $8,794 
Research and development76,483 55,253 
Sales and marketing35,517 23,834 
General and administrative32,179 15,546 
Total stock-based compensation expense$163,028 $103,427 
Stock Options
A summary of our stock option activity is as follows:
Options Outstanding
Stock
Options
Outstanding
Weighted-Average
Exercise
Price
Weighted-Average
Remaining
Contractual
Term
(In Years)
Balance as of December 31, 202235,718,803 $18.05 5.60
Granted57,553 $29.33 
Exercised(943,118)$8.69 
Forfeited, cancelled, or expired(372,542)$40.27 
Balance as of March 31, 202334,460,696 $18.08 5.30
The calculated grant-date fair value of stock options granted was estimated using the Black-Scholes option-pricing model with the following assumptions:
Three Months Ended March 31,
20232022
Expected dividend yield
Risk-free interest rate4.2%1.7%
Expected volatility54.7%33.8%
Expected term (in years)6.256.25
Fair value of underlying common stock$29.33$89.01
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Unity Software Inc.
Restricted Stock Units
A summary of our restricted stock unit ("RSU"), including Price-Vested Unit ("PVU"), activity is as follows:
Unvested RSUs
Number of
Shares
Weighted-Average
Grant-Date
Fair Value
Unvested as of December 31, 202238,105,462 $48.37 
Granted2,408,379 $28.90 
Vested(2,663,496)$58.25 
Forfeited(1,771,583)$54.37 
Unvested as of March 31, 202336,078,762 $46.05 
Price-Vested Units
In October 2022, our board of directors granted to certain of our executive officers a total of 989,880 PVUs, which are RSUs for which vesting is subject to the fulfillment of both a service period that extends up to four years and the achievement of a stock price hurdle during the relevant performance period that extends up to seven years. The fair value of each PVU award is estimated using a Monte Carlo simulation that uses assumptions determined on the date of grant. During the three months ended March 31, 2023, the service period and stock price hurdle were not met.
Employee Stock Purchase Plan
The fair value of shares offered under our Employee Stock Purchase Plan (the "ESPP") was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:
Three Months Ended March 31,
20232022
Expected dividend yield
Risk-free interest rate5.2%0.6%
Expected volatility94.5%40.0%
Expected term (in years)0.500.50
Estimated fair value$12.44$27.42
Additional information related to the ESPP is provided below (in thousands, except per share amounts):
Three Months Ended March 31,
20232022
Share issued under the ESPP532,643207,986
Weighted-average price per share issued$25.87$90.48
9. Income Taxes
Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, we update the estimated annual effective tax rate and make a year-to-date adjustment to the provision. The estimated annual effective tax rate is subject to volatility due to several factors, including variability in accurately predicting our pre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, and tax law developments.
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Unity Software Inc.
Our effective tax rate for the three months ended March 31, 2023 differs from the U.S. federal statutory tax rate of 21% primarily due to the need to record a valuation allowance in the U.S. on losses and to a lesser extent, tax expense on foreign earnings taxed at different rates. In addition, the Company undertook certain tax restructuring efforts during the period 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. Our effective tax rate for the three months ended March 31, 2022 differs from the U.S. federal statutory tax rate of 21% primarily due to foreign earnings taxed at different tax rates, credits and losses that cannot be benefited due to the valuation allowance on U.S., Denmark, and U.K. entities, and base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory research and development capitalization under IRC Section 174.
The realization of deferred tax assets is dependent upon the generation of sufficient taxable income of the appropriate character in future periods. We regularly assess the ability to realize our deferred tax assets and establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. In performing this assessment with respect to each jurisdiction, we review all available positive and negative evidence. Primarily due to our history of losses, we believe that it is more likely than not that the deferred tax assets of our U.S. federal, certain state, Denmark, U.K., and certain non-U.S. jurisdictions will not be realized and we have maintained a full valuation allowance against such deferred tax assets.
As of March 31, 2023, we had $179.8 million of gross unrecognized tax benefits, of which $25.8 million would impact the effective tax rate, if recognized. It is reasonably possible that the amount of unrecognized tax benefits as of March 31, 2023 could increase or decrease significantly as the timing of the resolution, settlement, and closure of audits is highly uncertain. We believe that we have adequately provided for any reasonably foreseeable outcome related to our tax audits and that any settlement will not have a material impact on our financial condition and operating results at this time.
10. Net Loss per Share of Common Stock
Basic and diluted net loss per share is the same for all periods presented because the effects of potentially dilutive items were antidilutive given our net loss in each period.
The following table presents potentially dilutive common stock excluded from the computation of diluted net loss per share for the following periods (in thousands) because the impact of including them would have been antidilutive:
Three Months Ended March 31,
20232022
Convertible notes26,042 12,441 
Stock options34,461 28,067 
Unvested RSUs and PVUs36,079 15,629 
11. Subsequent Event
In May 2023, we announced a restructuring that will eliminate approximately 600 employee roles and result in estimated severance costs of approximately $26 million, which will be substantially incurred in the second quarter of 2023.
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Unity Software Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Please read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Forward-looking statements are statements that attempt to forecast or anticipate future developments in our business, financial condition or results of operations. When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that could impact our business. In particular, we encourage you to review the risks and uncertainties described in "Part II, Item 1A. Risk Factors" included elsewhere in this report. These risks and uncertainties could cause actual results to differ materially from those projected in forward-looking statements contained in this report or implied by past results and trends. Forward-looking statements, like all statements in this report, speak only as of their date (unless another date is indicated), and we undertake no obligation to update or revise these statements in light of future developments. See the section titled "Note Regarding Forward-Looking Statements and Risk Factor Summary" in this report.
Overview
Unity is the world’s leading platform for creating and growing interactive, real-time 3D ("RT3D") content.
Our comprehensive set of software solutions supports them 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 distinct, but connected and synergistic, sets of solutions: Create Solutions and Grow Solutions.
Impact of Macroeconomic Trends
Recent negative macroeconomic factors, such as inflation, corresponding heightened interest rates and limited credit availability, the strengthening of the U.S. dollar, and continued softness of the advertising market have negatively impacted our business and may continue to do so. 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. For additional details, refer to the section titled "Risk Factors."
Key Metrics
As further discussed in Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K, we monitor the following key metrics to help us evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.
Customers Contributing More Than $100,000 of Revenue
We had 1,322 and 1,083 customers contributing more than $100,000 of revenue in the trailing 12 months as of March 31, 2023 and 2022, 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 ironSource Merger. While these customers represented the substantial majority of revenue for the three months ended March 31, 2023 and 2022, respectively, no one customer accounted for more than 10% of our revenue for either period.
Dollar-Based Net Expansion Rate
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.
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Unity Software Inc.
As of
March 31, 2023March 31, 2022
Dollar-based net expansion rate107 %135 %
Our dollar-based net expansion rate as of March 31, 2023 and 2022, 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 period, 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.
NER Quarterly Graph Q1 2023.jpg
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Unity Software Inc.
Results of Operations
The following table summarizes our historical consolidated statements of operations data for the periods indicated (in thousands):
Three Months Ended March 31,
20232022
Revenue$500,361 $320,126 
Cost of revenue161,964 93,833 
Gross profit338,397 226,293 
Operating expenses
Research and development280,480 221,040 
Sales and marketing216,127 103,939 
General and administrative96,774 72,475 
Total operating expenses593,381 397,454 
Loss from operations(254,984)(171,161)
Interest expense(6,129)(1,111)
Interest income and other expense, net13,615 941 
Loss before income taxes(247,498)(171,331)
Provision for income taxes6,205 6,224 
Net loss(253,703)(177,555)
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,
20232022
Revenue100 %100 %
Cost of revenue32 29 
Gross margin68 71 
Operating expenses
Research and development56 69 
Sales and marketing43 32 
General and administrative19 23 
Total operating expenses118 124 
Loss from operations(51)(53)
Interest expense(1)— 
Interest income and other expense, net— 
Loss before income taxes(49)(53)
Provision for income taxes
Net loss(50)%(55)%
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Unity Software Inc.
Revenue
Create Solutions
We generate Create Solutions revenue primarily through our suite of Create Solutions subscriptions, 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. Enhanced support services are provided to our enterprise customers and are sold separately from the Create Solutions subscriptions. Professional services are provided to our customers and include consulting, platform integration, training, and custom application and workflow development. Cloud and hosting services are provided to our customers to simplify and enhance the way our users access and harness our solutions.
Grow Solutions
We generate Grow Solutions revenue primarily through our monetization solutions, user acquisition offerings, and Supersonic, a game publishing service. 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; 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.
Our total revenue is summarized as follows (in thousands):
Three Months Ended
March 31,
20232022
Create Solutions$187,369 $164,544 
Grow Solutions312,992 155,582 
Total revenue$500,361 $320,126 
The increase in total revenue in the three months ended March 31, 2023, compared to the comparable prior year period, was primarily due to the acquisition and inclusion of revenue from ironSource within Grow Solutions. Revenue from Create Solutions increased primarily due to growth in new customers, as well as growth among existing customers.
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 intangible assets, related capitalized software 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.
20


Unity Software Inc.
Cost of revenue for the three months ended March 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with increased headcount including those associated with ironSource Merger, as well as an increase of approximately $27 million in amortization expenses related to intangible assets acquired through our business acquisitions. We also experienced an increase of approximately $9 million in hosting and other third party related expenses primarily due to the inclusion of ironSource, as well as higher expenses to support increased usage of our solutions.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. 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 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. For example, we incurred approximately $14 million in costs associated with headcount reductions during the quarter ended March 31, 2023 and in May, we announced that we estimate an additional amount of approximately $26 million to be substantially incurred in the second quarter of 2023.
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 three months ended March 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased due to the ironSource Merger and to support continued product innovation. The increase was further driven, to a lesser extent, by higher hosting expenses.
Sales and Marketing
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 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 three months ended March 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 $38 million. We also experienced higher personnel-related and user acquisition costs due to the ironSource Merger, as well as increased headcount to support the growth of our sales and marketing teams.
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.
21


Unity Software Inc.
General and administrative expense for the three months ended March 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses as headcount increased as a result of the ironSource Merger, which was partially offset by a decrease in professional fees.
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, 2023 increased, compared to the comparable prior year period, due to accrued interest on our 2027 notes and debt issuance costs amortization.
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. 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 three months ended March 31, 2023 increased, compared to the comparable prior year period, primarily due to interest and dividend income earned on our money market investments and time deposit accounts.
Provision for Income Taxes
Provision for income taxes consists primarily of income taxes in certain foreign jurisdictions where we conduct business. We have a valuation allowance against certain of our deferred tax assets, including net operating loss ("NOL") carryforwards and tax credits related primarily to research and development. Our overall effective income tax rate in future periods may be affected by the geographic mix of earnings in the countries in which we operate. Our future effective tax rate may also be affected by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles in the jurisdictions in which we conduct business. See Note 9, "Income Taxes," of the Notes to Condensed Consolidated Financial Statements.
Provision for income taxes for the three months ended March 31, 2023 decreased primarily due to tax benefits recognized for the three months ended March 31, 2023 from certain tax restructuring efforts during the period 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.
Non-GAAP Financial Measures
To supplement our consolidated financial statements prepared and presented in accordance with GAAP we use certain non-GAAP financial measures, as described below, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe the following non-GAAP measures are useful in evaluating our operating performance. 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.
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 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.
22


Unity Software Inc.
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, 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.
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):
Three Months Ended
March 31,
20232022
GAAP gross profit$338,397$226,293
Add:
Stock-based compensation expense18,8498,794
Amortization of intangible assets expense34,2657,555
Depreciation expense2,3641,238
Restructuring and reorganization costs119
Adjusted gross profit$393,994$243,880
GAAP gross margin68 %71 %
Adjusted gross margin79 %76 %
The following table presents a reconciliation of our adjusted EBITDA to net loss, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended
March 31,
20232022
Net loss$(253,703)$(177,555)
Stock-based compensation expense163,028103,427
Amortization of intangible assets expense97,92032,702
Depreciation expense11,6408,770
Acquisition-related costs7291,081
Restructuring and reorganization costs14,1302,330
Interest expense6,1291,111
Interest income and other expense, net(13,615)(941)
Income tax expense6,2056,224
Adjusted EBITDA$32,463$(22,851)
23


Unity Software Inc.
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 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,
20232022
Net cash provided by (used in) operating activities$(5,099)$101,300 
Less:
Purchases of property and equipment(14,350)(14,929)
Free cash flow$(19,449)$86,371 
Liquidity and Capital Resources
As of March 31, 2023, 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, while we are continuing to monitor recent developments with respect to liquidity concerns at, and failures of, banks and other financial institutions, we are not currently experiencing any limitations or restrictions on our ability to access these balances.
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 Part I, Item I, Note 7 — "Commitments and Contingencies" for additional discussion of our principal contractual commitments.
In connection with the ironSource Merger in November 2022, we issued 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 2026 in November 2021 (together with the 2027 Notes, the "Notes"). See Part I, Item I, Note 6, "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. As of March 31, 2023, $1.0 billion remains available for future share repurchases under this program. We did not repurchase any shares under the Share Repurchase Program during the quarter ended March 31, 2023.
Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $2.5 billion as of March 31, 2023. 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.
24


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. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions. Our future capital requirements, however, will depend on many factors, including our growth rate; the timing and extent of spending to support our research and development efforts; capital expenditures to build out new facilities and purchase hardware and software; the expansion of sales and marketing activities; 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. 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, 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,
20232022
Net cash provided by (used in) operating activities$(5,099)$101,300 
Net cash provided by (used in) investing activities88,111 (35,460)
Net cash provided by financing activities21,971 30,216 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash3,151 37 
Net change in cash, cash equivalents, and restricted cash$108,134 $96,093 
Cash Used in Operating Activities
During the three months ended March 31, 2023, net cash used in operating activities was primarily due to our net loss and changes in working capital, including payment in 2023 of the corporate bonus for our fiscal year ended December 31, 2022. 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 three months ended March 31, 2023, net cash provided by investing activities consisted primarily of proceeds received due to maturities of short-term investments.
Cash Provided by Financing Activities
During the three months ended March 31, 2023, net cash provided by financing activities consisted solely of proceeds from the issuance of common stock under our employee equity plans.
25


Unity Software Inc.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
There have been no material changes to our critical accounting policies and estimates from those disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 27, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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, 2022, filed with the SEC on February 27, 2023.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report.
Based on management’s evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control Over Financial Reporting
In November 2022, we completed the ironSource Merger. As part of our ongoing integration activities, we are in the process of incorporating internal controls over significant processes specific to ironSource that management believes are appropriate and necessary for us to report on internal controls over financial reporting as it relates to ironSource as of the end of fiscal year 2023. We expect to complete the integration activities related to internal control over financial reporting for ironSource during fiscal year 2023.
Except as noted above, there was no change in our internal control over financial reporting during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially effect, our internal control over financial reporting.
26


Unity Software Inc.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
On July 6, 2022, a putative securities class action complaint was filed in U.S. District Court in the Northern District of California against the Company and certain of its executives (the "Securities Class Action"). The complaint was amended on March 24, 2023, and captioned In re Unity Software Inc. Securities Litigation, Case No. 5:22-cv-3962 (N.D. Cal.). The operative complaint names as defendants Unity, its Chief Executive Officer, Chief Financial Officer, and General Manager of Operate Solutions, as well as Unity shareholders, Sequoia Capital, Silver Lake Group, and OTEE 2020 ApS. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and alleges that the Company and its executives made false or misleading statements and/or failed to disclose issues with the Company’s product platform and the likely impact of those issues on the Company’s fiscal 2022 guidance. The plaintiffs seek to represent a class of all persons and entities (other than the defendants) who acquired Unity securities between May 11, 2021 and May 10, 2022, and requests unspecified damages, pre- and post-judgment interest, and an award of attorneys' fees and costs. The Company believes this lawsuit is without merit and intends to vigorously defend the case.
On November 22, 2022, a derivative suit, captioned Movva v. Unity Software, Inc., et al., Case 5:22-cv-07416 (N.D. Cal.) (the "Movva Suit"), was filed by a purported stockholder against eleven of the Company’s current and former officers and directors. The complaint, which asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and violations of Section 14(a) of the Exchange Act, borrows the allegations of the Securities Class Action, and recasts them as derivative claims. On December 16, 2022, a related derivative suit, captioned Duong vs. Unity Software Inc., et al., Case 5:22-c-08926 (N.D. Cal.), was filed by a purported stockholder against the same defendants as in the Movva Suit (the "Duong Suit," and together with the Movva Suit, the "Federal Suits"). The two Federal Suits were consolidated after the parties jointly moved to do so. The Derivative Suits have been stayed pending the outcome of the motions to dismiss in the Securities Class Action. On May 8, 2023, a stockholder derivative suit, captioned Wen v. Botha, et al.., Case No. 2023-0499 (the “Wen Suit”), was filed in the Court of Chancery of the State of Delaware. The case was filed by a purported Unity stockholder against twelve of the Company’s current and former officers and directors, and asserts claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, and waste of corporate assets. As with the Federal Derivative suits, the Wen suit borrows the allegations of the Securities Class Action, and recasts them as derivative claims. The Company is still evaluating these new claims.
On August 8, 2022, a putative class action complaint, captioned Assad v. Botha et al, Case No. 2022-0691, was filed in the Court of Chancery against the Company and its board of directors. The complaint alleged that the directors breached their fiduciary duties by failing to disclose all material information necessary to allow stockholders to make a fully informed decision on whether to approve the issuance of new shares as a part of the Company's preliminary Form S-4 filed in connection with the Company's merger with ironSource. The plaintiff was a purported stockholder and sought to represent a class of stockholders voting in connection with the stock issuance. The complaint sought additional disclosure and an award of attorneys’ fees, among other remedies. On September 21, 2022, the complaint was withdrawn. On March 15, 2023, the plaintiff filed an application for an award of attorneys’ fees, and the Company responded on May 1, 2023.
From time to time, we may be subject to other legal proceedings and claims arising in the ordinary course of business.
27


Unity Software Inc.
Item 1A. Risk Factors
Risks Related to Our Business, Operations, and Industry
We have a history of losses and may not achieve or sustain profitability on a GAAP basis in the future.
We have experienced significant net losses on a GAAP basis in each period since inception. In addition, our revenue growth rate has varied and has in certain quarters declined and could vary and decline in the future, particularly in a difficult macroeconomic climate. We are not certain whether we will achieve or maintain profitability in the future. We also expect our costs and expenses to increase in the long term on a GAAP basis, which could negatively affect our future results of operations. In particular, we intend to continue to make significant investments to achieve profitability in such areas as:
research and development, including investments in our engineering teams and in further differentiating our platform and solutions with improvements to our Create and Grow Solutions, as well as the development of new products and features;
our sales and marketing organizations to engage our existing and prospective customers, increase brand awareness and drive adoption and expansion of our platform and solutions;
research and development and sales and marketing initiatives to grow our presence in new industries and use cases beyond the gaming industry;
our technology infrastructure, including systems architecture, scalability, availability, performance, and security;
acquisitions or strategic investments;
global expansion; and
our general and administration organization, including legal, IT, and accounting expenses associated with ongoing public company compliance and reporting obligations.
Our efforts to achieve profitability may be costlier than we expect and may not be effective. Even if such investments increase our revenue, any such increase may not be enough to offset increased operating expenses even with cost-cutting efforts, such as layoffs, which may not be effective.
We have a limited history operating our business at its current scale, including with ironSource, and as a result, our past results may not be indicative of future operating performance.
In recent years, we have significantly grown the scale of our business, both organically and through acquisitions, including the ironSource Merger. Accordingly, we have a limited history operating our business at its current scale and scope. You should not rely on our past results of operations as indicators of future performance.
Overall growth of our revenue is difficult to predict and depends in part on our ability to execute on our integration of ironSource and other growth strategies. For example, in the second and third quarters of 2022, our growth rate declined below our target long-term growth due to a variety of factors which could continue to impact our business, including the maturation of our business. In addition, recent negative macroeconomic factors, such as inflation and corresponding higher interest rates, liquidity concerns at, and failures of, banks and other financial institutions, and the strengthening of the U.S. dollar, have and may continue to negatively impact our business, as could the softening of the advertising market.
You should consider and evaluate our prospects in light of the risks and uncertainties frequently encountered by growing companies in rapidly evolving markets. These risks and uncertainties include challenges in accurate financial planning as a result of limited historical data relevant to the current scale and scope of our business and the uncertainties resulting from having had a relatively limited time period in which to implement and evaluate our business strategies as compared to companies with longer operating histories.
28


Unity Software Inc.
If we are not able to grow efficiently and manage our costs, we may not achieve profitability on a GAAP basis.
The growth and expansion of our business places a continuous significant strain on our management, operational and financial resources. As usage of our platform grows, we will need to devote additional resources to improving its capabilities, features and functionality. In addition, we will need to appropriately scale our internal business, IT, and financial, operating and administrative systems to serve our growing customer base, and continue to manage headcount, capital and operating and reporting processes, and integrate them with ironSource's, in an efficient manner. Any failure of or delay in these efforts could result in impaired performance and reduced customer satisfaction, resulting in decreased sales to new customers or lower dollar-based net expansion rates, which would hurt our revenue growth and our reputation. Further, any failure in optimizing the costs associated with our third-party cloud services as we scale could negatively impact our gross margins. Even if we are successful in our expansion efforts, they will be expensive and complex, and require the dedication of significant management time and attention. We may also suffer inefficiencies or service disruptions as a result of our efforts to scale our internal infrastructure. We cannot be sure that the expansion of and improvements to our internal infrastructure will be effectively implemented on a timely basis, if at all, and such failures could harm our business, financial condition and results of operations.
While growing our business necessarily requires increased costs in some parts of our business, we are also focusing on cost reduction efforts where possible. However, our cost reduction efforts may not be effective or sufficient to offset our increased expenses, and may themselves have adverse impacts, such as loss of continuity or accumulated knowledge, inefficiency during transitional periods, distraction, and potential challenges operating our business with fewer resources. Any failure of our cost reduction efforts could harm our business, financial condition and results of operations.
If our revenue growth does not meet our expectations in future periods and if we are unable to allocate our resources in a manner that results in sustainable revenue growth, while also managing our overall costs, we may not achieve or maintain profitability.
We may fail to realize all of the anticipated benefits of the ironSource Merger, or those benefits may take longer to realize than expected.
We believe that there are significant benefits and synergies that may be realized through leveraging the products, scale and combined enterprise customer bases of Unity and ironSource. However, the efforts to realize these benefits and synergies is a complex process and may disrupt our existing operations if not implemented in a timely and efficient manner. The full benefits of the ironSource Merger, including the anticipated sales or growth opportunities, may not be realized as expected or may not be achieved within the anticipated time frame, or at all. In addition, we may incur additional or unexpected costs in order to realize these revenue synergies. Failure to achieve the anticipated benefits of the ironSource Merger could adversely affect our results of operations or cash flows, cause dilution to our earnings per share, decrease or delay any accretive effect of the ironSource Merger and negatively impact our stock price.
Our success will depend, in part, on our ability to manage our expansion, which poses numerous risks and uncertainties, including the need to integrate the operations and business of ironSource into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with industry contacts and business partners.
In addition, we are devoting significant attention and resources to the integration and operation of the combined company, and to successfully aligning the business practices and operations of Unity and ironSource. This process may disrupt the businesses and, if ineffective, would limit the anticipated benefits of the ironSource Merger.
29


Unity Software Inc.
Acquisitions, mergers, strategic investments, partnerships, and alliances could be difficult to identify, integrate, divert the attention of management, disrupt our business, dilute stockholder value, and adversely affect our business.
We have in the past acquired or invested and may in the future seek to acquire or invest in businesses, joint ventures, platforms, or technologies that we believe could complement or expand our platform, enhance our technical capabilities, or otherwise offer growth opportunities. We have grown our revenue organically and through acquisitions including Parsec, Weta Digital, and ironSource. Our acquisitions and mergers have placed and will continue to place added burden on our management and internal resources, and the diversion of management's attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect our financial results. We may encounter difficulties assimilating or integrating any acquired companies or assets, particularly if the key personnel of an acquired company choose not to work for us, face cultural challenges, if their software or technology is not easily adapted to work with our platform, or we have difficulty retaining the customers of any acquired business. In addition, we have invested and may in the future invest in private companies and may not realize a return on our investments.
We have incurred significant costs, expenses and fees for professional services and other transaction costs in connection with the Weta Digital Acquisition and the ironSource Merger. We may also incur unanticipated costs in the integration of certain of Weta Digital's assets and of ironSource with our business. The substantial majority of these costs will be non-recurring expenses relating to the Weta Digital Acquisition and the ironSource Merger. We have been subject to litigation related to the ironSource Merger and could become subject to further litigation related to it or any other acquisition, which could result in significant costs and expenses.
These and any future transactions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Any such transactions that we are able to complete may not result in any synergies or other benefits we had expected to achieve, which could result in impairment charges that could be substantial. In addition, we may not be able to find and identify desirable acquisition targets or business opportunities or be successful in entering into an agreement with any particular strategic partner. These transactions have historically resulted and in the future could result in dilutive issuances of equity securities or the incurrence of debt, contingent liabilities, amortization expenses, incremental operating expenses, or the impairment of goodwill, any of which could adversely affect our results of operations. In addition, if the resulting business from such a transaction fails to meet our expectations, our business, financial condition and results of operations may be adversely affected or we may be exposed to unknown risks or liabilities and our efforts to limit such liabilities could be unsuccessful.
If we are unable to retain our existing customers–including ironSource customers–and expand their use of our platform, or attract new customers, our growth and operating results could be adversely affected, and we may be required to reconsider our growth strategy.
Our future success depends on our ability to retain our existing customers, expand their use of our platform and attract new customers. Our targeted marketing efforts may not be successful despite the resources we devote to them.
30


Unity Software Inc.
We derive a significant portion of our revenue from our Grow Solutions, and such revenue is primarily generated under a revenue-share or profit-share model. Under such models, our customers depend on us as a source of their own revenue, which in some cases may represent a significant portion of their revenue. Should customers lose confidence in the value or effectiveness of our monetization products or if our Grow products are less effective, consumption of these products could decline. For example, our revenue growth in the first half of 2022 was negatively impacted by challenges with our Grow products (including a fault in our platform that resulted in reduced accuracy of one of our monetization tools, as well as the consequences of ingesting bad data from a large customer) that reduced the efficacy of such products. We focused our resources on addressing the data quality and accuracy challenges we observed with certain monetization tools in the first quarter of 2022. Our interventions to address such challenges were effective; however, external factors, including the competitive landscape, negative macroeconomic conditions, longer sales cycles, and reduced advertiser spend prolonged our recovery and negatively impacted the growth of our Grow Solutions. We must continually add new features and functionality to our Grow Solutions to remain competitive and respond to our customers’ needs. If we are not successful in retaining and attracting new customers to our Grow Solutions, our business and results of operations would be adversely affected. In addition, if we fail to attract or retain existing ironSource customers into our Grow Solutions, our business could be harmed.
Our Grow Solutions is also dependent upon the continued proliferation of mobile connected devices, such as smartphones and tablets, which can connect to the Internet over a cellular, wireless or other network, as well as the increased consumption of content through those devices. Consumer usage of these mobile connected devices may be inhibited for a number of reasons beyond our control. If user adoption of mobile connected devices or user consumption of content on those devices do not continue to grow, our business could be harmed.