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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 September 30, 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 filer☒Accelerated filer☐
Non‑accelerated 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 November 1, 2023, there were 380,019,022 shares of the registrant's common stock outstanding.


UNITY SOFTWARE INC.
FORM 10‑Q
For the Quarter Ended September 30, 2023
TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
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.
•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 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. For example, in the third quarter of 2023 we announced changes to our pricing model for our Create Solutions, to become effective beginning in 2024. We experienced a high volume of negative customer feedback including a boycott and a slow down of signing new contracts and renewals as a result of these changes. If we fail to recover or reengage our customers or fail to attract new customers as a result of this announcement, our business 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.
•We are increasingly building artificial intelligence ("AI") into certain of our offerings, and issues raised by the use of AI in our offerings may adversely affect our business, reputation, or financial results.
•Recent negative macroeconomic factors, such as high and persistent inflation, rising interest rates, and limited credit availability has and could further cause economic uncertainty and volatility, which may adversely affect our business. Further, continued softness of the advertising market and increased restrictions on the gaming industry in China have impacted our growth rates and may continue to do so.
•Ongoing geopolitical instability and militarization, particularly in Israel, where a significant portion of our Grow Solutions operations is located, may adversely affect our business.
•The loss of one or more members of our senior management or key employees could harm our business, and we may not be able to find adequate replacements. For example, our board of directors is currently engaged in a search process for a permanent Chief Executive Officer and any inability to successfully transition the Chief Executive Officer role and/or attract a permanent successor for such role could adversely impact our business.
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 share data)
(Unaudited)
As of
September 30, 2023December 31, 2022
Assets
Current assets:
Cash and cash equivalents$1,507,164 $1,485,084 
Short-term investments— 101,711 
Accounts receivable, net604,743 633,775 
Prepaid expenses and other120,758 144,070 
Total current assets2,232,665 2,364,640 
Property and equipment, net140,807 121,863 
Goodwill3,202,116 3,200,955 
Intangible assets, net1,626,392 1,922,234 
Other assets223,703 224,293 
Total assets$7,425,683 $7,833,985 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable$22,166 $20,221 
Accrued expenses and other305,137 326,339 
Publisher payables408,259 445,622 
Deferred revenue214,788 218,102 
Total current liabilities950,350 1,010,284 
Convertible notes2,710,596 2,707,171 
Long-term deferred revenue65,323 103,442 
Other long-term liabilities234,044 258,959 
Total liabilities3,960,313 4,079,856 
Commitments and Contingencies (Note 7)
Redeemable noncontrolling interests216,945 219,563 
Stockholders' equity:
Common stock, $0.000005 par value:
Authorized shares - 1,000,000 and 1,000,000
Issued and outstanding shares - 379,720 and 374,243
2 2 
Additional paid-in capital6,071,209 5,779,776 
Accumulated other comprehensive loss(9,646)(1,691)
Accumulated deficit(2,819,081)(2,249,819)
Total Unity Software Inc. stockholders' equity3,242,484 3,528,268 
Noncontrolling interest5,941 6,298 
Total stockholders' equity3,248,425 3,534,566 
Total liabilities and stockholders' equity$7,425,683 $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 EndedNine Months Ended
September 30,September 30,
2023202220232022
Revenue$544,210 $322,881 $1,578,049 $940,050 
Cost of revenue151,349 111,903 472,140 302,572 
Gross profit392,861 210,978 1,105,909 637,478 
Operating expenses
Research and development240,003 248,380 788,438 685,380 
Sales and marketing194,000 109,639 619,258 314,486 
General and administrative86,256 92,585 272,047 246,065 
Total operating expenses520,259 450,604 1,679,743 1,245,931 
Loss from operations(127,398)(239,626)(573,834)(608,453)
Interest expense(6,154)(1,135)(18,425)(3,369)
Interest income and other expense, net16,013 2,208 38,689 91 
Loss before income taxes(117,539)(238,553)(553,570)(611,731)
Provision for Income taxes7,771 11,468 18,767 20,003 
Net loss(125,310)(250,021)(572,337)(631,734)
Net loss attributable to noncontrolling interest and redeemable noncontrolling interests(1,239)— (3,075)— 
Net loss attributable to Unity Software Inc.$(124,071)$(250,021)$(569,262)$(631,734)
Basic and diluted net loss per share attributable to Unity Software Inc.$(0.32)$(0.84)$(1.49)$(2.13)
Weighted-average shares used in computation of basic and diluted net loss per share383,674 299,062 382,939 296,768 
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 EndedNine Months Ended
September 30,September 30,
2023202220232022
Net loss$(125,310)$(250,021)$(572,337)$(631,734)
Other comprehensive income (loss), net of taxes:
Change in foreign currency translation adjustment(1,405)(3,858)(10,403)(4,205)
Change in unrealized losses on short-term investments— 206 — (5,513)
Change in unrealized gains (losses) on derivative instruments— — 289 — 
Other comprehensive loss(1,405)(3,652)(10,114)(9,718)
Comprehensive loss(126,715)(253,673)(582,451)(641,452)
Net loss attributable to noncontrolling interest and redeemable noncontrolling interests(1,239)— (3,075)— 
Foreign currency translation attributable to noncontrolling interest and redeemable noncontrolling interests(302)— (2,159)— 
Comprehensive loss attributable to noncontrolling interest and redeemable noncontrolling interests(1,541)— (5,234)— 
Comprehensive loss attributable to Unity Software Inc.$(125,174)$(253,673)$(577,217)$(641,452)
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 September 30, 2023
Accumulated
AdditionalOtherUnity Software Inc.
Common StockPaid-InComprehensiveAccumulatedStockholders'NoncontrollingTotal
SharesAmountCapitalLossDeficitEquity
Interest (1)
Equity
Balance at June 30, 2023383,290,627 $2 $6,149,631 $(8,543)$(2,695,010)$3,446,080 $6,046 $3,452,126 
Issuance of common stock from employee equity plans1,551,912 — 23,050 — — 23,050 — 23,050 
Issuance of common stock for settlement of RSUs2,435,827 — — — — — — — 
Purchase and retirement of common stock(7,558,415)— (250,000)— — (250,000)— (250,000)
Stock‑based compensation expense— — 151,155 — — 151,155 — 151,155 
Net loss— — — — (124,071)(124,071)(85)(124,156)
Adjustments to redeemable noncontrolling interest— — (2,627)— — (2,627)— (2,627)
Other comprehensive loss— — — (1,103)— (1,103)(20)(1,123)
Balance at September 30, 2023379,719,951 $2 $6,071,209 $(9,646)$(2,819,081)$3,242,484 $5,941 $3,248,425 
Three Months Ended September 30, 2022
Accumulated
AdditionalOther
Unity Software Inc.
Common StockPaid-InComprehensiveAccumulatedStockholders'NoncontrollingTotal
SharesAmountCapitalLossDeficitEquity
Interest (1)
Equity
Balance at June 30, 2022298,027,552 $2 $4,005,333 $(9,924)$(1,713,340)$2,282,071 $— $2,282,071 
Issuance of common stock from employee equity plans857,179 — 18,766 — — 18,766 — 18,766 
Issuance of common stock for settlement of RSUs1,703,186 — — — — — — — 
Stock‑based compensation expense— — 154,479 — — 154,479 — 154,479 
Net loss— — 1,043 — (250,021)(248,978)— (248,978)
Other comprehensive loss— — — (3,652)— (3,652)— (3,652)
Balance at September 30, 2022300,587,917 $2 $4,179,621 $(13,576)$(1,963,361)$2,202,686 $— $2,202,686 
.

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

Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY—CONTINUED
(In thousands, except share data)
(Unaudited)
Nine Months Ended September 30, 2023
Accumulated
AdditionalOtherUnity Software Inc.
Common StockPaid‑InComprehensiveAccumulatedStockholders’NoncontrollingTotal
SharesAmountCapitalLossDeficitEquity
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 plans5,121,763 — 64,994 — — 64,994 — 64,994 
Issuance of common stock for settlement of RSUs7,913,407 — — — — — — — 
Purchase and retirement of common stock(7,558,415)— (250,000)— — (250,000)— (250,000)
Stock‑based compensation expense— — 478,698 — — 478,698 — 478,698 
Net loss— — — — (569,262)(569,262)(210)(569,472)
Adjustments to redeemable noncontrolling interest— — (2,259)— — (2,259)— (2,259)
Other comprehensive loss— — — (7,955)— (7,955)(147)(8,102)
Balance at September 30, 2023379,719,951 $2 $6,071,209 $(9,646)$(2,819,081)$3,242,484 $5,941 $3,248,425 
Nine Months Ended September 30, 2022
Accumulated
AdditionalOtherUnity 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 plans4,103,922 — 56,484 — — 56,484 — 56,484 
Issuance of common stock for settlement of RSUs3,722,318 — — — — — — — 
Common stock issued in connection with acquisitions169,321 — 16,072 — — 16,072 — 16,072 
Stock‑based compensation expense— — 376,148 — — 376,148 — 376,148 
Net loss— — 1,043 — (631,734)(630,691)— (630,691)
Other comprehensive loss— — — (9,718)— (9,718)— (9,718)
Balance at September 30, 2022300,587,917 $2 $4,179,621 $(13,576)$(1,963,361)$2,202,686 $— $2,202,686 
(1) Excludes redeemable noncontrolling interests.
See accompanying Notes to Condensed Consolidated Financial Statements
5

Unity Software Inc.
UNITY SOFTWARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20232022
Operating activities
Net loss$(572,337)$(631,734)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization331,662 127,598 
Stock-based compensation expense467,743 376,148 
Other11,557 9,386 
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable, net28,346 21,258 
Prepaid expenses and other22,354 (8,499)
Other assets33,533 25,898 
Accounts payable568 974 
Accrued expenses and other(24,021)(6,643)
Publisher payables(37,362)(64,991)
Other long-term liabilities(59,262)(27,506)
Deferred revenue(40,184)167,741 
Net cash provided by (used in) operating activities162,597 (10,370)
Investing activities
Purchases of short-term investments(212)(150,911)
Proceeds from principal repayments and maturities of short-term investments102,673 374,659 
Purchases of non-marketable investments(2,500)(15,000)
Sales of non-marketable investments— 1,000 
Purchases of property and equipment(44,560)(42,344)
Business acquisitions, net of cash acquired— (25,840)
Net cash provided by investing activities55,401 141,564 
Financing activities
Repurchase and retirement of common stock(250,000)— 
Proceeds from issuance of common stock from employee equity plans64,994 56,484 
Net cash provided by (used in) financing activities(185,006)56,484 
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash(17,656)(4,185)
Increase in cash, cash equivalents, and restricted cash15,336 183,493 
Cash and restricted cash, beginning of period1,505,688 1,066,599 
Cash, cash equivalents, and restricted cash, end of period$1,521,024 $1,250,092 
Supplemental disclosure of cash flow information:
Cash paid for interest$10,389 $— 
Cash paid for income taxes, net of refunds$15,869 $21,818 
Cash paid for operating leases$31,645 $19,031 
Supplemental disclosures of non‑cash investing and financing activities:
Fair value of common stock issued as consideration for business and asset acquisitions$— $16,072 
Assets acquired under operating lease$37,479 $11,575 
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 September 30,Nine Months Ended September 30,
2023202220232022
Create Solutions$188,900 $189,178 $569,379 $518,316 
Grow Solutions355,310 133,703 1,008,670 421,734 
Total revenue$544,210 $322,881 $1,578,049 $940,050 
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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 September 30,Nine Months Ended September 30,
2023202220232022
United States$142,612 $80,272 $417,511 $223,986 
Greater China (1)
65,092 44,341 194,390 130,471 
EMEA (2)
200,927 112,012 575,870 329,159 
APAC (3)
122,001 76,969 348,636 228,730 
Other Americas (4)
13,578 9,287 41,642 27,704 
Total revenue$544,210 $322,881 $1,578,049 $940,050 
(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 September 30, 2023 and December 31, 2022, the allowance for uncollectible amounts was $15.5 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 September 30, 2023, capitalized commissions, net of amortization, included in prepaid expenses and other and other assets were $7.1 million and $3.8 million, respectively. During the three and nine months ended September 30, 2023, we recorded amortization costs of $2.5 million and $7.5 million, respectively, in sales and marketing expenses, as compared to $2.4 million and $6.9 million during the three and nine months ended September 30, 2022, respectively.
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 $39.7 million and $37.5 million as of September 30, 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 nine months ended September 30, 2023 that was included in the deferred revenue balances at January 1, 2023 was $185.6 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 September 30, 2023, were $566.1 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 $292.8 million or 52% of this revenue during the next 12 months.
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Unity Software Inc.
3. Financial Instruments
Cash, Cash Equivalents, Restricted Cash, and Short-term Investments
Cash, cash equivalents, restricted cash, 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 cash, cash equivalents, restricted cash, and short-term investments that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (in thousands):
September 30, 2023December 31, 2022
Fair Value (1)
Cash$812,876 $699,340 
Level 1:
Restricted cash and cash equivalents:
Restricted cash$13,860 $20,604 
Money market funds497,226 373,619 
Time deposits197,062 412,125 
Total restricted cash and cash equivalents$708,148 $806,348 
Short-term investments$— $101,711 
Total cash, cash equivalents, restricted cash, and short-term investments$1,521,024 $1,607,399 
(1)    Due to the highly liquid nature of our investments, amortized cost approximates fair value.
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 the estimated fair value. As of September 30, 2023 and December 31, 2022, such equity investments totaled $33.6 million and $31.1 million, respectively. No adjustments to the carrying value of these equity investments were recorded for the three and nine months ended September 30, 2023 and 2022.
4. Investment in Unity China
The results of Unity China, of which third-party investors hold 20.5%, are included in our condensed consolidated financial statements. 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):
Three Months Ended September 30, 2023Nine Months Ended September 30, 2023
Balance at beginning of period$215,749 $219,563 
Net loss attributable to redeemable noncontrolling interests(1,153)(2,865)
Accretion for redeemable noncontrolling interests 6,401 12,775 
Foreign currency translation and foreign exchange adjustments for redeemable noncontrolling interests(4,052)(12,528)
Balance at end of period$216,945 $216,945 
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 September 30,Nine Months Ended September 30,
2023202220232022
Operating lease expense$10,524 $6,550 $30,292 $22,334 
Variable lease expense1,408 1,292 3,850 4,130 
Sublease income(493)— (1,317)— 
Total lease expense$11,439 $7,842 $32,825 $26,464 
Supplemental balance sheet information related to leases was as follows (in thousands, except weighted-average figures):
As of
ClassificationSeptember 30, 2023December 31, 2022
Operating lease assetsOther assets$131,371 $120,535 
Current operating lease liabilitiesAccrued expenses and other$38,617 $34,469 
Long-term operating lease liabilitiesOther long-term liabilities111,272 107,776 
Total operating lease liabilities$149,889 $142,245 
As of September 30, 2023 and December 31, 2022, our operating leases had a weighted-average remaining lease term of 5.2 years and 5.0 years, respectively, and a weighted-average discount rate of 5.0% and 4.0%, respectively.
As of September 30, 2023, our lease liabilities were as follows (in thousands):
Operating Leases
Gross lease liabilities$170,195 
Less: imputed interest20,306 
Present value of lease liabilities$149,889 
10

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.
Combined interest expense on the 2027 Notes related to regular interest and the amortization of debt issuance costs was $5.1 million and $15.1 million for the three and nine months ended September 30, 2023, respectively. The estimated fair value of the 2027 Notes were approximately $1.1 billion as of September 30, 2023, which is based on a combination of a discounted cash flow and Black-Scholes option-pricing model.
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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 $1.2 million and $3.4 million for the three and nine months ended September 30, 2023, respectively. The estimated fair value of the 2026 Notes were approximately $1.4 billion as of September 30, 2023, which is based on quoted prices for the notes as of that date.
The table below summarizes the principal and unamortized debt issuance costs for the 2026 and 2027 Notes (in thousands):
As of
September 30, 2023
Convertible notes:
Principal - 2026 Notes$1,725,000 
Principal - 2027 Notes1,000,000 
Unamortized debt issuance cost - 2026 and 2027 Notes(14,404)
Net carrying amount$2,710,596 
As of September 30, 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 September 30, 2023, the Capped Call Transactions met the conditions for equity classification and were not in the money.
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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 September 30, 2023 (in thousands):
TotalRemainder of 20232024‑20252026‑2027Thereafter
Operating leases (1)
$170,195 $11,402 $77,494 $42,812 $38,487 
Purchase commitments (2)
826,294 127,455 479,962 218,877 — 
Convertible notes (3)
2,725,000 — — 2,725,000 — 
Total$3,721,489 $138,857 $557,456 $2,986,689 $38,487 
(1)    Operating leases consist of obligations for real estate that are active.
(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," above for further discussion.
We expect to meet our remaining commitments.
Legal Matters
In the normal course of business, we are subject to various legal matters. We accrue a liability when management believes that it is both probable that a liability has been incurred and 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 September 30, 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 $13.9 million and $20.6 million of secured letters of credit outstanding as of September 30, 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 as other assets on our condensed consolidated balance sheets.
8. Stockholders' Equity
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 through November 2024 (the "Share Repurchase Program"). During the nine months ended September 30, 2023, we repurchased 7.6 million shares of common stock under this program for an aggregate purchase price of $250.0 million. As of September 30, 2023, $750.0 million remained available for future share repurchases under this program.
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Unity Software Inc.
9. Stock‑Based Compensation
Stock-based compensation expense is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Cost of revenue$19,591 $18,097 $58,241 $38,768 
Research and development66,618 81,490 214,159 196,853 
Sales and marketing35,075 31,381 105,272 80,340 
General and administrative25,893 23,511 90,071 60,187 
Total stock-based compensation expense$147,177 $154,479 $467,743 $376,148 
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
Granted298,422 $35.24 
Exercised(4,057,471)$9.32 
Forfeited, cancelled, or expired(701,596)$45.47 
Balance as of September 30, 202331,258,158 $18.74 4.96
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 September 30,Nine Months Ended September 30,
2023202220232022
Expected dividend yield————
Risk-free interest rate4.4%3.3%
3.8% - 4.4%
1.7% - 3.3%
Expected volatility58.0%33.5%
54.7% - 58.0%
33.3% - 33.8%
Expected term (in years)6.256.256.256.25
Fair value of underlying common stock$39.29$42.72
$29.33 - $39.29
$38.47 - $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 
Granted4,372,148 $32.57 
Vested(7,913,418)$53.57 
Forfeited(4,928,164)$52.32 
Unvested as of September 30, 202329,636,028 $44.00 
Price-Vested Units
In October 2022, we 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 and nine months ended September 30, 2023, the service period condition and stock price hurdle were not met.
Employee Stock Purchase Plan
The fair value of shares offered under our Employee Stock Purchase Plan ("ESPP") was determined on the grant date using the Black-Scholes option pricing model. The following table summarizes the assumptions used and the resulting grant-date fair values of our ESPP:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Expected dividend yield————
Risk-free interest rate5.5%3.3%
5.2% - 5.5%
0.6% - 3.3%
Expected volatility65.9%33.5%
65.9% - 94.5%
35.5% - 40.0%
Expected term (in years)0.500.500.500.50
Grant-date fair value per share$12.65$10.51
$12.44 - $12.65
$10.51 - $27.42
Additional information related to the ESPP is provided below (in thousands, except per share amounts):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Shares issued under the ESPP531,820399,0231,064,463607,009
Weighted-average price per share issued$25.25$36.31$25.56$54.87
10. 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 and nine months ended September 30, 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, we undertook certain tax restructuring efforts during the first quarter of 2023 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 and nine months ended September 30, 2022 differed from the U.S. federal statutory tax rate of 21% primarily due to the base-erosion and anti-abuse tax ("BEAT") mainly arising as a result of mandatory research and development capitalization under the IRC Section 174, losses that cannot be benefited due to the valuation allowance on U.S., Denmark, and United Kingdom ("U.K.") entities, and to a lesser extent, foreign earnings taxed at different tax rates.
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 U.S. states, Denmark, U.K., and other non-U.S. jurisdictions will not be realized and we have maintained a full valuation allowance against such deferred tax assets.
As of September 30, 2023, we had $183.4 million of gross unrecognized tax benefits, of which $29.7 million would impact the effective tax rate, if recognized. It is reasonably possible that the amount of unrecognized tax benefits as of September 30, 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.
11. 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 (in thousands) because the impact of including them would have been antidilutive:
As of September 30,
20232022
Convertible notes26,042 5,588 
Stock options31,258 26,822 
Unvested RSUs and PVUs29,636 29,943 
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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 and experiences. Our comprehensive set of software, including AI solutions, supports creators 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 and Geopolitical Events
Recent negative macroeconomic factors, such as high and persistent inflation, rising interest rates, and limited credit availability have and could further cause economic uncertainty and volatility, which could harm our business. Further, continued softness of the advertising market and ongoing restrictions related to the gaming industry in China have impacted our growth rates and may continue to do so. Ongoing geopolitical instability, particularly in Israel, where a significant portion of our Grow Solutions operations is located, may adversely affect our business.
Recent Developments in Our Business
In the third quarter of 2023, we announced changes to our pricing model for our Create Solutions, to become effective beginning in 2024. We experienced a high volume of negative customer feedback including a boycott and a slow down of signing new contracts and renewals as a result of these changes. Customer responses did not materially impact our results for the third quarter of 2023, and while we expect a potential benefit from this change over the long term for Create Solutions, the ultimate impact on our business remains uncertain.
In the fourth quarter of 2023, we underwent a CEO change and began a comprehensive assessment of our product portfolio to focus on those offerings that are most valuable to our customers, which are the core aspects of our Create and Grow Solutions. This assessment will likely lead us to decide to discontinue certain offerings, reduce our workforce and reduce our office footprint. The timing and full impact of these types of changes on our future results of operations, cash flows, or financial condition are uncertain, and for those reasons we are currently unable to reasonably quantify the potential impacts through the fourth quarter of 2023.
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.
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Unity Software Inc.
Customers Contributing More Than $100,000 of Revenue
We had 1,324 and 1,075 customers contributing more than $100,000 of revenue in the trailing 12 months as of September 30, 2023 and 2022, respectively. The year over year increase was largely a result of the ironSource Merger. While these customers represented the substantial majority of revenue for the nine months ended September 30, 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, excluding Strategic Partnerships and, starting in the first quarter of 2023, Supersonic, from the same set of customers across comparable periods, calculated on a trailing 12-month basis. Had we excluded Supersonic in the fourth quarter of 2022, the dollar-based net expansion rate would have been 118%.
As of
September 30, 2023September 30, 2022
Dollar-based net expansion rate102 %111 %
Our dollar-based net expansion rate as of September 30, 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 primarily 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 of 2022 due to the ironSource Merger.
Q3'23 NER chart.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 September 30,Nine Months Ended September 30,
2023202220232022
Revenue$544,210 $322,881 $1,578,049 $940,050 
Cost of revenue151,349 111,903 472,140 302,572 
Gross profit392,861 210,978 1,105,909 637,478 
Operating expenses
Research and development240,003 248,380 788,438 685,380 
Sales and marketing194,000 109,639 619,258 314,486 
General and administrative86,256 92,585 272,047 246,065 
Total operating expenses520,259 450,604 1,679,743 1,245,931 
Loss from operations(127,398)(239,626)(573,834)(608,453)
Interest expense(6,154)(1,135)(18,425)(3,369)
Interest income and other expense, net16,013 2,208 38,689 91 
Loss before income taxes(117,539)(238,553)(553,570)(611,731)
Provision for Income taxes7,771 11,468 18,767 20,003 
Net loss(125,310)(250,021)(572,337)(631,734)
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 September 30,Nine Months Ended September 30,
2023202220232022
Revenue100 %100 %100 %100 %
Cost of revenue28 35 30 32 
Gross profit72 65 70 68 
Operating expenses
Research and development44 77 50 73 
Sales and marketing36 34 39 33 
General and administrative15 29 17 26 
Total operating expenses95 140 106 132 
Loss from operations(23)(74)(36)(65)
Interest expense(2)— (1)— 
Interest income and other expense, net3 1 2 — 
Loss before income taxes(22)(73)(35)(65)
Provision for Income taxes1 4 1 2 
Net loss(23)%(77)%(36)%(67)%
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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 EndedNine Months Ended
September 30,September 30,
2023202220232022
Create Solutions$188,900 $189,178 $569,379 $518,316 
Grow Solutions355,310 133,703 1,008,670 421,734 
Total revenue$544,210 $322,881 $1,578,049 $940,050 
The increase in total revenue in the three and nine months ended September 30, 2023, compared to the comparable prior year periods, was primarily due to the acquisition and inclusion of revenue from ironSource within Grow Solutions. Revenue from Create Solutions was largely flat for the three months ended September 30, 2023, compared to the comparable prior period, primarily due to a decline in the consumption of hosting services by our customers, partially offset by an increase in revenue from our subscription offerings. Revenue from Create Solutions increased in the nine months ended September 30, 2023, compared to the comparable prior period, primarily due to growth in new customers, as well as growth among existing customers. Revenue from Grow Solutions increased in the three months ended September 30, 2023, compared to the comparable prior period, primarily because of the ironSource Merger, which includes the return of certain customer incentives issued by ironSource prior to the merger.
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, and capitalized software and depreciation of related property and equipment.
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Unity Software Inc.
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.
Cost of revenue for the three and nine months ended September 30, 2023 increased, compared to the comparable prior year periods, primarily due to an increase of approximately $35 million and $89 million for the three and nine months ended September 30, 2023, respectively, in amortization expenses related to intangible assets acquired through our business combinations as well as higher personnel-related expenses. We also experienced an increase of approximately $7 million and $21 million for the three and nine months ended September 30, 2023, respectively, in hosting and other third-party related expenses primarily due to the inclusion of ironSource.
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. In May 2023, we announced a workforce reduction of approximately 8% of our then total workforce as we restructured specific teams in order to continue to position ourselves for long-term and profitable growth. Following this announcement, we incurred expenses of approximately $25 million in connection with the workforce reduction, of which we recorded $3 million in cost of revenue, $14 million in research and development expense, $6 million in sales and marketing expense, and $2 million in general and administrative expense. These expenses were primarily related to employee transition, severance payments, and employee benefits. In addition, our annual compensation cycle was not completed until October 2023 and did not impact our costs for the three or nine months ended September 30, 2023.
Research and Development
Research and development expenses primarily consist of personnel-related costs for the design and development of our platform, IT hosting and SaaS expenses, and rent expenses. We expense research and development expenses as they are incurred. We expect our research and development expenses to increase in absolute dollars and to fluctuate as a percentage of revenue from period to period as we expand our teams to develop new solutions, expand features and functionality with existing solutions, and enter new markets.
Research and development expense for the three months ended September 30, 2023 decreased, compared to the comparable prior year periods, due to lower personnel costs, partially offset by expenses resulting from the ironSource merger. Research and development expense for the nine months ended September 30, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses resulting from the ironSource Merger. 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.
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Unity Software Inc.
Sales and marketing expense for the three and nine months ended September 30, 2023 increased, compared to the comparable prior year periods, primarily due to an increase in amortization expense related to intangible assets acquired through our business acquisitions of approximately $34 million and $113 million, respectively, and higher user acquisition costs and higher personnel-related expenses due to the ironSource Merger.
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.
General and administrative expense for the three months ended September 30, 2023 decreased, compared to the comparable prior year period, primarily due to a decrease in professional fees. General and administrative expense for the nine months ended September 30, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with 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 and nine months ended September 30, 2023 increased, compared to the comparable prior year periods, due to accrued interest on our 2027 notes and amortization of debt issuance costs.
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 and nine months ended September 30, 2023 increased, compared to the comparable prior year periods, 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 10, "Income Taxes," of the Notes to Condensed Consolidated Financial Statements.
Provision for income taxes for the three and nine months ended September 30, 2023 decreased, compared to the comparable prior year periods, primarily due to an increase in earnings in jurisdictions with a lower effective tax rate and certain tax restructuring efforts made during the nine months ended September 30, 2023.
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Unity Software Inc.
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.
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
September 30,
20232022
GAAP gross profit$392,861$210,978
Add:
Stock-based compensation expense19,59118,097
Amortization of intangible assets expense35,1917,713
Depreciation expense2,8921,720
Adjusted gross profit$450,535$238,508
GAAP gross margin72 %65 %
Adjusted gross margin83 %74 %
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Unity Software Inc.
The following table presents a reconciliation of our adjusted EBITDA to net loss, the most directly comparable measure as determined in accordance with GAAP, for the periods presented (in thousands):
Three Months Ended
September 30,
20232022
GAAP net loss$(125,310)$(250,021)
Stock-based compensation expense147,177154,479
Amortization of intangible assets expense99,22033,419
Depreciation expense11,97710,071
Acquisition-related costs—9,576
Restructuring and reorganization costs—909
Interest expense6,1541,135
Interest income and other expense, net(16,013)(2,208)
Income tax expense7,77111,468
Adjusted EBITDA$130,976$(31,172)
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):
Nine Months Ended September 30,
20232022
Net cash provided by (used in) operating activities$162,597 $(10,370)
Less:
Purchases of property and equipment(44,560)(42,344)
Free cash flow$118,037 $(52,714)
Net cash provided by investing activities$55,401 $141,564 
Net cash provided by (used in) financing activities$(185,006)