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Unity Software IPO | S-1 Breakdown

By 

Max Motschwiller

|

Sep 10, 2020

Unity Software, is the leading platform for creating and operating interactive, real-time 3D content, filed for a $100M IPO, which is a placeholder amount. Goldman Sachs is leading the IPO and Unity plans to trade on the New York Stock Exchange (NYSE) under the ticker “U”. Unity is one of the many SaaS companies that have recently filed including Asana, JFrog*, Palantir, Snowflake* and Sumo Logic. With favorable market conditions, specifically for the technology and SaaS ecosystem, companies are taking advantage and marching toward the public markets.

Unity helps creators’ imaginations comes to life and operates in the fastest growing sector in media – gaming – with over 2.5 billion active end-players globally. The company believes the "world is a better place with more creators in it." Historically, the creation of even the most basic 3D gaming applications required large teams, a lot of time and the use of many disparate, often custom, solutions. In many cases, development of the same game would be replicated across multiple different platforms. Unity provides a comprehensive set of software solutions to create, run and monetize interactive, real-time 2D and 3D content across multiple platforms (mobile, PC, console, virtual reality (VR) devices). The company launched its first game development engine in 2004 and has significantly expanded their suite of products both organically and through acquisitions (more below) to include developer Operate Solutions and products for non-gaming industry creators. While Unity has been around for 16 years, the traction over the past several years has been outstanding. The company did $541.8M in 2019 revenue, up 42% YoY with 1.5 million monthly active creators in over 190 countries and territories. The applications developed by these creators were downloaded over three billion times per month in 2019 on over 1.5 billion unique devices. They ended last quarter at $737.3M of revenue run-rate (quarterly revenue * 4) with accelerating QoQ growth in Q2-20. Unity is based in San Francisco, California and has 3,379 full-time employees, across 44 offices in 16 countries. The company was founded as Over the Edge Entertainment in Denmark in 2004 and was reorganized as a Delaware corporation in May 2009 as Unity Software inc.

Company Timeline Graphic

Source: S-1

Product / Business Model

Source: S-1

Unity’s software offers a comprehensive set of solutions to create, run and monetize interactive, real-time 2D and 3D content across broad range of third-party content distribution platforms. The platform consists of two distinct, but connected and synergistic sets of solutions:

Create Solutions are used by content creators—developers, artists, designers, engineers and architects—to make interactive, real-time 2D and 3D content. As a result, content built on the Unity platform offers end-users engaging and immersive experiences and can significantly reduce development/design costs and cycle times.

Starting in 2016, Create Solutions were primarily sold through monthly subscriptions. The company has pricing models for subscription plans designed to support creators at every stage of growth including Unity Student and Unity Personal. Customers with > $100K of TTM typically purchase Unity Plus, Unity Pro or Unity Enterprise. Over two-thirds of Create Solutions revenue in 2019 was generated from customers subscribing to the Unity Pro plan, which includes access to additional resources and support designed to meet the needs of larger customers.

Operate Solutions consist of a portfolio of products and services that offer customers the ability to grow and engage their user bases, as well as to run and monetize their content, with the goal of optimizing end-user acquisition and operational costs while increasing the lifetime value of customers’ end-users. Operate Solutions can be used on content irrespective of whether the content was created in Unity. Specifically, Unity Ads and Unity IAP (In-App Purchases), help developers maximize the revenue potential of their content. End-user engagement products, such as deltaDNA, provide developers with the capability to perform deep analytics to optimize engagement and LTV. Other solutions like Multiplay (multiplayer hosting) and Vivov (player-to-player communications) help simplify the delivery of content and enhance back-end management in games.

Operate Solutions revenue is generated primarily through revenue-share. The remainder is generated as usage-based revenue.

Unity’s relentless focus on product innovation through research and development and acquisitions has enabled them to maintain a strong market leading position in the game developer community. In 2019 on a global basis, Unity estimates that 53% of the top 1,000 mobile games on the Apple App Store and Google Play and over 50% of such mobile games, PC games and console games combined were made with Unity. 93 of the top 100 game development studios by global revenue in 2019 were Unity customers. This leadership position combined with strong analytics helps create an end-user data footprint. The company continuously captures and analyzes end-user behavior and application performance data from over 50 billion in-app events per day across over 20 different platforms. This data helps developers further optimize performance around end-user acquisition, engagement and lifetime value making the product more attractive to both developers and end-users.

As expected, Unity has a highly engaged base of creators of 1.5 million monthly active creators, with users of their Unity Pro product spending an average of 4.9 hours per day actively using the platform in 2019, and an average of 5.1 hours per day for the first six months of 2020.

Strategic Partnerships and Other: Unity's third revenue line is from strategic partnerships, which are mainly agreements with hardware, operating system, device, game console and other technology providers. The company customizes their software to make the Unity platform interoperable with these partner platforms. These partnerships enable creators to easily deploy their games and applications to relevant devices and platforms without the need for duplicative and time-consuming, platform-specific coding.

Revenue Percentage By Revenue Type

Source: S-1

Growth Rates by Revenue Type (YoY)

It is worth noting that in the June 30, 2020 quarter the Create and Operate solutions experienced accelerating YoY growth likely reflecting the end-user growth in time spent playing games during the COVID-19 pandemic.

Source: S-1

Summary Metrics and GTM (Go-to-Market)

Unity’s revenue is substantially recurring in nature, both from pure subscription and on-going revenue share or usage. That said, they do not explicitly break out subscription revenue, recurring revenue, or annual recurring revenue (ARR). Create customers typically purchase 1-3 year subscriptions, billed in monthly, quarterly or annual installments. Independent creators and smaller studios typically subscribe to plans with a one-year term that are billed monthly. The majority of subscription fees are billed in advance, and as such, Unity records deferred revenue on their consolidated balance sheet for unearned revenue and recognizes this deferred revenue ratably over the subscription term. Operating Solution fees from revenue share and usage are typically billed monthly.

Unity’s GTM approach varies by industry. Gaming is a mature vertical where the company has significant brand equity within the game developer community and can leverage a self-serve and account based GTM strategy. This has resulted in substantial organic growth with lower customer acquisition costs. Sales and marketing resources in gaming are focused on larger accounts, through account-based marketing programs and a direct sales force. Replacing traditional in-house technologies is a key focus to expanding existing client relationships. Both Create and Operate can be the starting point and gateway to cross-sell opportunities.

In other industries, Unity is building out its direct sales and marketing efforts. Because the use of real-time 3D technology in other industries is still emerging and Unity’s brand is not as strong in these newer verticals, the sales cycles are longer and more resource intensive today.

  • As of December 31, 2019, 48, or 8%, of Unity's 600 customers contributing > $100K in TTM revenue were in industries beyond gaming. As of June 30, 2020, they had more than 750 customers in industries beyond gaming, and 60, or 8%, of their 716 customers contributing> $100K in TTM revenue were in industries beyond gaming.
  • Non-gaming customer include Volvo (Automotive, Transportation, Manufacturing), Skansa (Architecture, Engineering, Construction), Baobab Studios (Film, Animation, Cinematics).
  • At the end of Q2-20, Unity had 716 customers with TTM revenue > $100K. These customers had an average ACV of $190.5K.
  • Unity's dollar-based revenue expansion ranged from 122-142% over the past 10 quarters
  • Unity has 3,379 full-time employees as of June 30, 2020 and ended 2019 with 2,715 full-time employees
  • On December 20, 2019, the company committed to a revolving loan facility of $125.0M. The credit facility has a maturity date of five years.
  • As of last quarter, the company owns 40 issued U.S. patents, 8 non-US patents and 79 patent applications.
  • The company captures and analyzes 50 billion in-app events per day across over 20 different platforms as end-users interact with games and applications made with Unity.
  • 50%+ of mobile games, PC games and console games combined are made with Unity.

Revenue by Geography

Unity has a globally diversified revenue base with 30% of revenue or less coming from the United States in all reported periods. It is impressive that north of 10% of revenue comes from the Greater China area.

Source: S-1

Market Opportunity

Unity points out that the world is quickly moving to content that is interactive, real-time and 3D, which is where the company has a leadership position. Gaming is leading the revolution, but other industries are starting to follow the movement from static to dynamic and interactive content. The gaming industry is growing rapidly having generated less than $15B of annual revenue less than 20 years ago and generating over $140B of annual revenue today.  

Unity believes their total market opportunity is approximately $29 billion across both gaming and other industries. In gaming, they estimate the market opportunity for their Create Solutions and Operate Solutions to be approximately $12 billion in 2019 across over 15 million potential creators, growing to over $16 billion in 2025. In industries beyond gaming, they estimate the market opportunity for Create Solutions and Operate Solutions to be approximately $17 billion today.

Competition

With respect to Create Solutions, Unity primarily competes against proprietary game engines built in-house by large game studios, as well as Unreal Engine (Epic Games) and Cocos2d (Chukong Technologies), which offer game development tools primarily serving the PC games and mobile games sectors. Outside of gaming, they also compete with other development platforms that offer 2D and 3D design products.

With respect to Operate Solutions, Unity competes in a fragmented ecosystem composed of select divisions of large, well-established companies as well as privately held companies. The large companies in the ecosystem include Amazon, Facebook, Google, Microsoft and Tencent.

It is also worth noting that some of Unity’s competitors offer their solutions, like game engines, at lower prices or for free.

Acquisitions

Although the significant majority of Unity’s revenue growth has been organic, they have completed over a dozen acquisitions since 2011 including Applifier, deltaDNA, Finger Food, Multiplay, and Vivox. Acquisitions have primarily included smaller teams with specific product expertise bringing greater functionality into the platform and furthering Unity’s goal of being the one-stop integrated platform for all creator needs.

An output of the major acquisitions since 2018 is shown below:

Source: S-1

Investors and Ownership

Unity has raised at over $700M via Series A through E rounds. According to Pitchbook, investors include D1 Capital, DFJ, Sequoia, Silver Lake and Thrive among others. The Series E preferred stock of ~5.7M shares was done at $22.00 a share ($124.9M in total) in May 2019, valuing the company at approximately $6.28B in the private markets.

Outputs of their capitalization table and preferred stock financings are below:

% Ownership, Pre-Offering

Source: S-1

Preferred Stock Share Prices by Series

Source: S-1

Financials and Other Metrics Outputs

Unity has large revenue scale with over double the median SaaS IPO scale compared to the 2019 cohort of SaaS IPOs and is growing quickly with a market that should continue to support growth well into the future. Gross margins are strong in the high 70s percent to low 80s percent range. They also have one of the best net dollar retention rates with each of the last four quarters greater than 130% and an acceleration in Q2-20 to 142%. Unity is growing relatively efficiently with a median payback period of just under 20 months over the last eight quarters.

Outputs of other metrics are below:

Historical P&L & Metrics ($000's)

Source: S-1

Quarterly Revenue ($M)

Source: S-1

Ending Revenue RR ($M)

Unity does not report ARR or breakout subscription or recurring revenue. Ending revenue run-rate shown below equals quarterly revenue * 4. Unity has some seasonality where December quarters are typically their largest net-new revenue add quarters in a given year.

Source: S-1

Quarterly Non-GAAP Gross Margin and Operating Expenses as a % of Revenue

Source: S-1

GAAP and Non-GAAP Operating Margins

Source: S-1

Customers > $100K TTM Revenue

Unity does not disclose total customer numbers, but discloses detail around customers with > $100K TTM revenue.

Source: S-1

Sales Efficiency and Payback Periods

Unity doesn’t release customer counts by quarter, but the below output plots their implied months to payback using the inverse of a CAC ratio (net new RR multiplied by gross margin/sales and marketing spend of the prior quarter). The magic number is defined as net new RR/sales and marketing spend of the prior quarter. For their scale, their sales efficiency is strong. The median months-to-pay-back over the disclosure period is 19.4 months.

Source: S-1

Dollar-Based Expansion Rate

Unity has very strong net-expansion rates in the 122-142% range over all reported periods and greater than 99% gross logo retention rate for customers > $100K of annual revenue.

Source: S-1

Annual Customer Cohorts

Source: S-1

Cash Flows ($M)

Source: S-1

Quarterly GAAP P&L (000's)

Source: S-1

Valuation ($M)

Unity will trade like other high-growth SaaS companies: on a multiple of forward revenue. The output below uses NTM (next-twelve-months) revenue based on an illustrative range of growth rates and comparable EV (enterprise value) / NTM revenue multiples from other public, high-growth SaaS businesses. It also includes an implied ARR multiple range. As mentioned in other posts, companies do not release projections or guidance in S-1's. While the markets have come down a bit over the past week, multiples for high-growth public SaaS companies are still healthy and I suspect Unity trades north of $10B, well above the last round preferred price of ~6B+.

Source: Multiple ranges from Meritech Enterprise Public Comparables section. Enterprise value ranges are illustrative.

Unity is one of the most exciting software companies to file an S-1. As the gaming industry continues to grow and new genres and platforms emerge, Unity stands to benefit as developers must continue to build and innovate in a dynamic market. Beyond gaming, Unity’s real-time 3D technology platform is also starting to permeate other industry verticals like transportation, architecture, construction, manufacturing and media & entertainment. While other software for 3D content creation and game monetization exists, Unity has a dominant leadership position having won the mindshare of the global developer community and has illustrated the ability to continue to improve and grow their product offering over the years. Public market investors will likely dig into Unity’s ability to add large new customer logos outside of gaming and closely monitor their pricing model as they compete against cheaper alternatives. Given Unity’s business model is closely linked to customer growth through a revenue-share model, COVID-19 appears to be having a positive impact on growth. Investors will closely monitor the continued COVID-19 impact and may anticipate softness if a vaccine is discovered and overall time spent playing games drops as the world resumes to pre-COVID behavior. Perhaps what is most exciting is that the future of consumer entertainment will be heavily influenced by the tools that Unity continues to bring to market, especially around potential platform shifts like augmented reality (AR) and virtual reality (VR).

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Special thanks to my partners Aimee He and Anthony DeCamillo for their help on this post.

Disclosures:

*Meritech is an investor in Snowflake.

*My partner Alex Clayton invested in JFrog while at Spark Capital.

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