Unity beats both EPS (actual $-0.18, expected $-0.21) and revenue expectation
Revenue at $297.0m (+9% YoY) was just above their own guidance of $290 million to $295 million.
Revenue breakdown - Create $120.9m (+66% YoY), Operate 153.5 (-13% YoY), Partnership 17.7 (-2% YoY)
Customers generating $100k+ revenue 1,085 (+22.18% YoY)
Dollar-based net expansion rate 121% vs 142% (Q2, 21)
Big news coming are:
Fixed the inaccuracy of the pinpointer tool and put in place monitoring mechanisms to react faster if something goes wrong
Key partnerships secured with Mercedes-Benz and Capgemini
Guidance:
Q3 revenue $315m-$335m (+10% to 17% YoY), 2022 revenue $1.3b-$1.35b (17% to 22% YoY)
Unity beating the expectations was expected. Revenue from the operate solutions was a bit disappointing but given their claim that they have fixed their data issue with pinpointer we should see what Q3 holds. While YoY customers generating $100k+ revenue is great, QoQ it’s an almost flat line - I am happy if they can most of them. Despite the dollar-based net expansion rate decreasing, I don’t see quite a problem with it.
The news about pinpointer is certainly exciting, but I would be cautious and wait to see Q3 results to believe it. Guidance was lowered from $1.35b, while it’s not terrible, it’s not certainly good.
Overall as an investor in Unity, I am not thrilled with this quarter. However, it was not as bad to make any selling decisions either. So, I will be holding it.
Next, let's talk about the merger/acquisition between unity x ironsource or unity x applovin.
So, in about 1 months' back, unity agrees to acquire ironsource under which ironSource will merge into a wholly-owned subsidiary of Unity via an all-stock deal, where each ordinary share of ironSource will be exchanged for 0.1089 shares of Unity common stock. Once closed, current Unity stockholders will own approximately 73.5% and current ironSource shareholders will own approximately 26.5% of the combined company.
The deal will bring together the Unity game engine and editor, Unity Ads, and the rest of Unity Gaming Services (UGS) with ironSource’s best-in-class mediation and publishing platforms, giving developers a seamless and interoperable way to create, grow, and monetize their creations across their lifecycle. In the near term, ironSource's mediation platform will leverage the combined strength of the two companies' ad networks to deliver increased user reach and data scale, and provide an increased return on ad spend to advertisers. Telcos will also benefit from the combination of Unity and ironSource, which will provide them with enhanced opportunities to leverage interactive gaming and RT3D experiences on-device.
In addition to delivering benefits for creators, this transaction also provides significant benefits to shareholders. The combined company is expected to generate a run rate of $1 billion in Adjusted EBITDA by the end of 2024.
In connection with the merger, Unity’s Board of Directors have also authorized a 24-month share buyback program of up to $2.5 billion, effective upon closing of the merger, which is expected to reduce dilution caused by the transaction.
Silver Lake and Sequoia have fully committed to purchase an aggregate of $1 billion in convertible notes from Unity at closing, demonstrating their belief in the value creation potential of the merger. The convertible notes to be issued to Silver Lake and Sequoia are due in 2027 and bear an interest rate of 2% per annum. The conversion price is $48.89 per share.
Upon closing of the merger, Tomer Bar-Zeev will join Unity’s Board of Directors and serve as a key member of Unity’s executive leadership team. In addition, two additional ironSource Directors will join the Unity Board of Directors upon closing of the transaction. Bar-Zeev and other members of ironSource's management team, who will also assume leadership roles in the combined company, have an established track record of building a profitable, high-growth leader in the global app economy. ironSource's headquarters in Israel will serve as an additional global hub for Unity.
So now behold a new contender that is applovin. which announced it has submitted a compelling non-binding proposal to the Board of Directors of Unity Software Inc. (NYSE: U) to combine AppLovin, a leader in mobile marketing and monetization, with Unity, an industry leading platform for creating and operating interactive, real-time 3D (RT3D) content, in a transaction where each outstanding share of Unity common stock would be exchanged for 1.152 shares of AppLovin Class A voting common stock and 0.314 shares of AppLovin Class C non-voting common stock.1 Under these terms, current Unity shareholders would receive approximately 55.0% of the outstanding shares of the combined company, with the Class A shares representing approximately 49.0% of the outstanding voting rights of the combined company.
The combination of the two businesses would expect to generate substantial revenue growth, cash flow and operational efficiencies that are well beyond each company’s potential standalone performance. AppLovin estimates this combination will create over $700 million of Adjusted EBITDA from synergies in 2025, with a minimum of $500 million in 2024.
AppLovin proposes that Unity’s CEO John Riccitiello become CEO of the combined business and Adam Foroughi become the COO. The Board of Directors of the combined company would be reconstituted so that Unity would appoint the majority of members, consistent with Unity shareholders’ economic stake.
Based on this non-binding proposal, existing AppLovin Class B common shares (20:1 votes) would be converted to Class A common shares (1:1 vote) in connection with the closing of the proposed transaction. AppLovin shareholders would hold approximately 45% of the outstanding common shares of the combined company, including Class C, with such shares representing approximately 51% of the outstanding voting rights of the combined company. Unity stockholders would receive approximately 55% of the outstanding shares of the combined company, with Class A common shares representing approximately 49% of the outstanding voting rights of the combined company.
All-stock merger consideration payable in a mix of AppLovin Class A and Class C common stock would value Unity at $58.85 per share and $20 billion enterprise value, representing a 48% premium to the Unity share price as of 7/12/2022 and 18% to yesterday’s closing price (based on the closing price of AppLovin’s Class A common stock on 8/8/2022).
For unity to accept the merger/acquisition by applovin, they have to terminate the merger agreement that they made to ironsource.
So, who do you think unity should merge with ?
Let me know your opinions in the comment.
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