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Unity’s earnings show just how hard it is to earn a 10x software multiple today

Demonstrating operating leverage is not enough in a conservative market


Image Credits: Nigel Sussman (opens in a new window)

It’s a busy week for technology earnings, with companies including Coinbase, Alibaba and Etsy dropping numbers detailing their recent performance.

Unity is in the mix as well, providing the investing public with its first set of numbers since it closed its merger with ironSource. The deal brought Unity’s broadly applicable development engine and ironSource’s mobile app management and monetization service under the same roof.

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However, while some tech companies saw a share-price bump after releasing their earnings data, Unity’s shares lost around 13% in early trading today, indicating investor dissatisfaction with its results. In brief, Unity’s forward guidance fell short of expectations, leading to the street to bid its equity lower.

At the open of trading today, Unity is worth $13.2 billion. It estimates that its revenues will come in above $2 billion this year (more on that shortly), giving it an effective revenue multiple of 6x or a little more. Naturally, TechCrunch is not in the business of valuing public companies. We do, however, spend a lot of time thinking about the value of private companies in tech spaces: your startups, scaleups, unicorns and public-market truants.

The changing value of public tech companies impacts the value of private tech companies, meaning that we have to pay attention to what the stock market tells us.

In the case of Unity, the lesson is simple: It’s hard as hell to earn, let alone defend, a 10x revenue multiple in today’s market. For startups eyeing their next round or an eventual exit price, Unity’s results and guidance crossed with investor reaction should function as a warning.


Last May, this column noted that the market appeared to be heading toward a world where single-digit software-as-a-service (SaaS) revenue multiples would become pedestrian. Given that we had seen double-digit multiples in the preceding years and even some whispered-about triple-digit multiples given to the hottest startups, the idea that tech valuations could compress to a singular character almost felt doomer-esque. Little did we know.

Today, the Bessemer Cloud Index calculates an “average revenue multiple” for cloud and software stocks of just 6.9x. The median figure for the same collection of public cloud companies is even lower, around 5.5x, a number that represents a recovery from recent lows.

All this is to underscore the point that a 10x multiple for a software company today is anything but a given.

Now, put valuations aside for a minute and observe the following set of numbers from Unity’s Q4 2022 report. I’ve included caveats where required for context:

  • Unity revenue: $451 million, up 43% year over year (if ironSource had been part of Unity since the start of 2021, the company’s growth rate would have risen a smaller 9.5% in Q4).
  • Unity revenue forecast: $470 million to $480 million in Q1, $2.05 billion to $2.2 billion for the year (up from $1.39 billion in 2022).
  • Unity net loss: $287.8 million in Q4 2022, up from $161.7 million in the year-ago quarter.
  • Unity adjusted operating income: $13 million, Unity’s “first profitable quarter as a public company” on a non-GAAP basis.

The company’s revenue growth was largely bolstered by its acquisition of ironSource, clearly enough. Unity’s unprofitability on a GAAP basis (inclusive of all costs) is a sticking point. That’s the bad news.

On the flip side, its major transaction is complete (and the integration thereof is going “as planned,” per Unity); profitability is improving, the gaming giant anticipates scaling; and it expects positive adjusted EBITDA this year ($230 million to $300 million, including $7 million to $12 million in the first quarter).

How is the company going to manage such a rapid ramp in adjusted profitability? Here’s a bit from its earnings call (Fool transcript; emphasis added):

Now on the cost side, we’re taking very clear actions to improve profitability. And this includes things like the elimination of close to 300 roles that we announced before, being very selective in any future new hires that we add to the company, being more focused in our investments and reducing the number of beds that we make at Unity, raising the bar on cost, and we’ve been turning every stone once or twice and finding new opportunities in a few places. And that, frankly, includes reducing the number of shares that we grant as part of compensation. So, we’re taking a very holistic view on cost and making sure that costs are adding value.

And as a result, you should expect to see costs relatively flat during the year as revenue grows quarter over quarter. Now what happens then is that we expect to significantly improve profitability in 2023. If you look at — we had a loss of $90 million non-GAAP in 2022, and we expect adjusted EBITDA to be about somewhere in the range of $230 million to $300 million in 2023. So, very significant swing from one year to another.

Unity is looking to reduce existing costs, avoid new expenses and is even making noise about reducing the pace at which it uses shares to compensate employees, potentially slowing the dilution of existing shareholders. This is what we’ve been told investors want to see today: spend discipline and resulting operating leverage.

But even with post-merger revenue growth baked in for the year and profitability set to scale dramatically, per the company’s own expectations, its shares are down sharply.

The reason why is pretty simple: For the coming quarter and year, street estimates were $524.79 million and $2.2 billion (Yahoo Finance data). Unity, with what it described as “conservative” guidance during its call, missed those figures.

You could argue that Unity’s GAAP unprofitability is too large an issue to put aside as it works to grow its adjusted incomes this year. You could also argue that its growth rate is too tied to the ironSource deal to merit Unity many plaudits when it comes to year-over-year revenue gains. But haven’t we expected software companies to largely report adjusted incomes as they look to change their growth/profit balance? And Unity is still growing despite a lackluster gaming growth background.

Isn’t this what tech companies were supposed to be doing? And yet, the result for Unity is downward value pressure.

It doesn’t matter if you think that the public market is being too harsh or simply fair to Unity. What does carry weight for startups is the lesson that even with strong software products (Unity’s engine is popular for a reason), robust growth and improving adjusted profits, you can still sit with a single-digit multiple around your neck.

It’s going to take a lot to make that change, which means that Unity’s results and resulting share price decline are the present reality. The bar isn’t just higher than it was for tech company performance: It’s taken flight.

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