# Unity Software Inc. (U) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Unity Software Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1810806/000181080624000053/unity-20231231.htm
Accession: 0001810806-24-000053
Filing date: 2024-02-29
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/U/
All MD&A years: /company/U/mda/
Previous year: /company/U/mda/fy2022/ (FY 2022)
Next year: /company/U/mda/fy2024/ (FY 2024)

Item 7. 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 consolidated financial statements and related notes included under Part II, Item 8 of this Annual Report on Form 10-K. 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 I, 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" in this report.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussion of 2021 and year-over-year comparisons between fiscal 2022 and 2021 that are not included in this Form 10-K can be found under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that was filed with the SEC on February 27, 2023, and are incorporated by reference herein.

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
[[/GREPCENT_TABLE]]

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 complementary sets of solutions: Create Solutions and Grow Solutions, which together comprise our strategic portfolio surrounding the Unity Engine, Cloud and Monetization.

Impact of Macroeconomic Trends and Geopolitical Events

Recent negative macroeconomic factors, such as inflation, high interest rates, and limited credit availability have and could further cause economic uncertainty and volatility, which could harm our business. Further, increased competition in 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, which will become effective for users of the next major release of the software expected to be available in 2024. We experienced a high volume of negative customer feedback including a boycott and a slowdown of signing new contracts and renewals as a result of these changes, which we believe negatively impacted our Grow Solutions revenue in the second half of 2023. While we expect a potential benefit from this change over the long term for our business, 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 and our cost structure, to focus on those offerings that are most valuable to our customers, which are the core aspects of our Create and Grow Solutions. In this effort to reset, we plan to meaningfully decrease our offering of professional services and hardware components that support our hosting services and cease further development of our artistry tools. Together, these offerings contributed approximately $280 million of revenue in 2023, predominately within Create Solutions. In addition, in the fourth quarter of 2023 and the first quarter of 2024, we announced reductions to our workforce and our office footprint. In the fourth quarter of 2023 we incurred approximately $16 million of impairment charges on operating leases. In the first quarter of 2024, we expect to recognize approximately $195 million in employee separation costs, primarily related to the acceleration and modifications of equity awards. These costs associated with lease terminations and employee separations encompass the substantive cost components of our restructuring efforts.

Our ability to execute on these plans or execute them in a timely manner is critical to our success, and their timing and full impact on our future results of operations, cash flows, or financial condition are uncertain.

For additional details, refer to the section titled "Risk Factors."

Key Metrics

We monitor the following key metrics to help us evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions.

Customers Contributing More Than $100,000 of Revenue

We focus on the number of customers that generated more than $100,000 of revenue in the trailing 12 months, as this segment of our customer base represents the majority of our revenue. We define a customer as an individual or entity that generated revenue during the measurement period. A single organization with multiple divisions, segments, or subsidiaries is generally counted as a single customer,

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
[[/GREPCENT_TABLE]]

even though we may enter into commercial agreements with multiple parties within that organization. We had 1304, 1340, and 1052 such customers in the trailing 12 months as of December 31, 2023, 2022, and 2021, respectively. The year over year decrease was largely a result of our de-emphasis on professional services and hosting services, as well as a more competitive environment for our Monetization solutions in 2023. While these customers represented the substantial majority of revenue for the years ended December 31, 2023, 2022, and 2021, respectively, no one customer accounted for more than 10% of our revenue for any of those years.

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%.

Our dollar-based net expansion rate as of a period end is calculated as current period revenue divided by prior period revenue. Prior period revenue is the trailing 12-month revenue measured as of such prior period end and includes revenue from all customers that contributed revenue during such trailing 12-month period. Current period revenue is the trailing 12-month revenue from these same customers as of the current period end. Our dollar-based net expansion rate includes the effect of any customer renewals, expansion, contraction, and churn but excludes revenue from new customers in the current period.

[[GREPCENT_TABLE]]
[["","As of December 31,"],["","2023","","2022","","2021"],["Dollar-based net expansion rate","104","%","","116","%","","140","%"]]
[[/GREPCENT_TABLE]]

Our dollar-based net expansion rate as of December 31, 2023, 2022, and 2021 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 periods, is primarily attributable to Grow Solutions, due to increased competition 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.

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
[[/GREPCENT_TABLE]]

Results of Operations

The following table summarizes our consolidated statements of operations data for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["","","","","","2023","","2022","","2021"],["Revenue","","","","","$","2,187,317","","","$","1,391,024","","","$","1,110,526"],["Cost of revenue","","","","","733,722","","","442,500","","","253,630"],["Gross profit","","","","","1,453,595","","","948,524","","","856,896"],["Operating expenses"],["Research and development","","","","","1,053,588","","","959,491","","","695,710"],["Sales and marketing","","","","","834,625","","","497,956","","","344,939"],["General and administrative","","","","","398,176","","","373,290","","","347,912"],["Total operating expenses","","","","","2,286,389","","","1,830,737","","","1,388,561"],["Loss from operations","","","","","(832,794)","","","(882,213)","","","(531,665)"],["Interest expense","","","","","(24,580)","","","(7,404)","","","(1,131)"],["Interest income and other expense, net","","","","","59,529","","","7,192","","","1,566"],["Loss before income taxes","","","","","(797,845)","","","(882,425)","","","(531,230)"],["Provision for Income taxes","","","","","28,477","","","37,063","","","1,377"],["Net loss","","","","","$","(826,322)","","","$","(919,488)","","","$","(532,607)"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
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The following table sets forth the components of our consolidated statements of operations data as a percentage of revenue for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Revenue","100","%","","100","%","","100","%"],["Cost of revenue","34","","","32","","","23"],["Gross profit","66","","","68","","","77"],["Operating expenses"],["Research and development","48","","","69","","","63"],["Sales and marketing","38","","","36","","","31"],["General and administrative","18","","","27","","","31"],["Total operating expenses","104","","","132","","","125"],["Loss from operations","(38)","","","(63)","","","(48)"],["Interest expense","(1)","","","(1)","","","\u2014"],["Interest income and other expense, net","2","","","1","","","\u2014"],["Loss before income taxes","(37)","","","(63)","","","(48)"],["Provision for Income taxes","1","","","3","","","\u2014"],["Net loss","(38)","%","","(66)","%","","(48)","%"]]
[[/GREPCENT_TABLE]]

Revenue

Create Solutions

We generate Create Solutions revenue primarily through our suite of Create Solutions subscriptions inclusive of 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 and game publishing services. 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. Our game publishing services provide 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 these publishing services, we generate revenue from in-app advertising in published games and in some cases, in app purchase revenue.

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
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Our total revenue is summarized as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022","","2021"],["Create Solutions","$","859,174","","","$","716,078","","","$","506,920"],["Grow Solutions","1,328,143","","","674,946","","","603,606"],["Total revenue","$","2,187,317","","","$","1,391,024","","","$","1,110,526"]]
[[/GREPCENT_TABLE]]

The increase in total revenue for the year ended December 31, 2023, compared to the comparable prior year period, was primarily due to the acquisition and inclusion of revenue from ironSource within Grow Solutions. Grow Solutions revenue includes approximately $72 million related to the return of customer incentives issued by ironSource prior to the merger and we do not expect to receive any material amounts in future periods. Grow Solutions revenue was also negatively impacted by increased competition, which we expect will continue in 2024. Revenue from Create Solutions increased for the year ended December 31, 2023, compared to the comparable prior year periods, primarily due to approximately $99 million of incremental revenue in the fourth quarter of 2023 from Wētā FX Limited, as a result of terminating their subscription rights in exchange for a perpetual license, and growth among existing customers primarily due to our price increases.

Cost of Revenue, Gross Profit, and Gross Margin

Cost of revenue consists primarily of personnel costs (including salaries, benefits, and stock-based compensation) for employees and subcontractors associated with our product support and professional services organizations, the amortization of intangible assets, hosting expenses, and depreciation of related property and equipment.

Gross profit, or revenue less cost of revenue, has been and will continue to be affected by various factors, including our product mix, the costs associated with third-party hosting services and the extent to which we expand and drive efficiencies in our hosting costs, professional services, and customer support organizations. We expect our gross profit to increase in absolute dollars in the long term but decrease in the short term as we reset our product portfolio to focus on the Unity Engine and Monetization solutions. We expect our gross profit as a percentage of revenue, or gross margin, to fluctuate from period to period.

Cost of revenue for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to an increase of approximately $197 million in amortization expenses related to intangible assets acquired through our business combinations, including $105 million of incremental expense in the fourth quarter of 2023 due to fully amortizing an intangible assets related to the Wētā FX Limited contract that was terminated, as well as higher personnel-related expenses.

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 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 November 2023, we announced an amendment of our agreements with Wētā FX Limited, and committed to a plan to close corporate offices in approximately 14 locations. Following these announcements, we incurred incremental expenses of approximately $121 million from fully amortizing contract intangible assets related the Wētā FX Limited, primarily within cost of revenue. We also incurred restructuring and reorganization expenses of approximately $70 million for the year ended December 31, 2023, of which $52 million related to reductions in our workforce, largely within research and development expense, and $18 million related to

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[["Table of Contents","","Unity Software Inc."]]
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our intent to exit certain leased facilities, primarily impairment charges on operating lease assets in general and administrative expense.

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 amortization expenses related to intangible assets. We expect our research and development expenses to increase in absolute dollars in the long term, as we expand our teams to develop new solutions, expand features and functionality with existing solutions, and enter new markets, but decrease in the short term as we reset our strategic portfolio. We expect research and development expenses to fluctuate as a percentage of revenue from period to period.

Research and development expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related, and hosting expenses resulting from the ironSource Merger.

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 amortization expenses related to intangible assets. We expect that our sales and marketing expense will increase in absolute dollars in the long term, 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, but decrease in the short term as we reset our strategic portfolio. We expect sales and marketing expenses to fluctuate as a percentage of revenue from period to period.

Sales and marketing expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to an increase in amortization expense related to intangible assets acquired through our business acquisitions of approximately $136 million, 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; allocated overhead, and professional fees for external legal, accounting and other professional services. We expect that our general and administrative expenses will increase in absolute dollars in the long term, as we scale to support the growth of our business but decrease in the short term as we reset our strategic portfolio. We expect general and administrative expenses to fluctuate as a percentage of revenue from period to period.

General and administrative expense for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to higher personnel-related expenses associated with the ironSource Merger, and to a lesser extent lease related expenses, 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 year ended December 31, 2023 increased, compared to the comparable prior year period, 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, foreign currency 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.

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
[[/GREPCENT_TABLE]]

Interest income and other expense, net, for the year ended December 31, 2023 increased, compared to the comparable prior year period, primarily due to rising interest rates increasing the 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 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 13, "Income Taxes," of the Notes to Consolidated Financial Statements.

Provision for income taxes for the year ended December 31, 2023 decreased, compared to the comparable prior year period, primarily due to certain tax restructurings that affect our ongoing computation of qualifying foreign income, made during the year ended December 31, 2023.

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, insurance reimbursement for legal expenses, 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.

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Adjusted gross profit and adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•they exclude expense associated with our equity compensation plans, although equity compensation has been, and will continue to be, an important part of our compensation strategy;

•adjusted gross profit and adjusted EBITDA excludes the expense of amortization of acquired intangible assets and depreciation of property and equipment, and although these are non-cash expenses, the assets being amortized may have to be replaced in the future and adjusted gross profit and adjusted EBITDA does not reflect cash expenditure for such replacements;

•adjusted EBITDA excludes costs incurred from our acquisitions, and in connection with the formation of Unity China;

•adjusted gross profit and adjusted EBITDA excludes costs incurred from restructuring activities;

•adjusted EBITDA excludes costs incurred from legal settlements that we anticipate recovering through insurance, and subsequent recoveries of those amounts;

•the expenses and other items that we exclude in our calculation of adjusted gross profit and adjusted EBITDA may differ from the expenses and other items, if any, that other companies may exclude from this measure or similarly titled measures, which reduces their usefulness as comparative measures.

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):

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022"],["GAAP gross profit","$","1,453,595","","","$","948,524"],["Add:"],["Stock-based compensation expense","80,213","","","57,271"],["Amortization of intangible assets expense","243,690","","","46,942"],["Depreciation expense","10,480","","","6,397"],["Restructuring and reorganization costs","13,510","","","576"],["Adjusted gross profit","$","1,801,488","","","$","1,059,710"],["GAAP gross margin","66","%","","68","%"],["Adjusted gross margin","82","%","","76","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["Table of Contents","","Unity Software Inc."]]
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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):

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022"],["GAAP net loss","$","(826,322)","","","$","(919,488)"],["Stock-based compensation expense","648,696","","","537,818"],["Amortization of intangible assets expense","515,489","","","172,551"],["Depreciation expense","48,427","","","39,025"],["Acquisition-related costs","888","","","41,465"],["Restructuring and reorganization costs","70,373","","","17,146"],["Insurance reimbursement for legal settlement","(3,250)","","","3,250"],["Interest expense","24,580","","","7,404"],["Interest income and other expense, net","(59,529)","","","(7,192)"],["Income tax expense","28,477","","","37,063"],["Adjusted EBITDA","$","447,829","","","$","(70,958)"]]
[[/GREPCENT_TABLE]]

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.

Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

•it is not a substitute for net cash (used in) provided by operating activities;

•other companies may calculate free cash flow or similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of free cash flow as a tool for comparison; and

•the utility of free cash flow is further limited as it does not reflect our future contractual commitments and does not represent the total increase or decrease in our cash balance for any given period.

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):

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022"],["Net cash provided by (used in) operating activities","$","234,700","","","$","(59,431)"],["Less:"],["Purchases of property and equipment","(55,921)","","","(57,138)"],["Free cash flow","$","178,779","","","$","(116,569)"],["Net cash provided by investing activities","$","44,040","","","$","723,228"],["Net cash used in financing activities","$","(174,015)","","","$","(226,634)"]]
[[/GREPCENT_TABLE]]

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Liquidity and Capital Resources

As of December 31, 2023, our principal sources of liquidity were cash and cash equivalents totaling $1.6 billion, which were primarily held for working capital purposes. Our cash equivalents are invested primarily in government money market funds.

Our material cash requirements from known contractual and other obligations consists of our convertible notes, obligations under operating leases for office space, and contractual obligations for hosting services to support our business operations. See Item 8 of Part II, "Financial Statements and Supplementary Data — Note 10 — Commitments and Contingencies" for additional discussion of our principal contractual commitments.

In connection with the ironSource Merger in November 2022, we issued $1.0 billion in aggregate principal amount of 2.0% convertible senior notes due 2027, the proceeds of which were used to fund repurchases under our share repurchase program. We previously issued $1.7 billion in aggregate principal amount of 0% convertible senior notes due 2026 in November 2021. See Note 9, "Borrowings," for additional discussion of the Notes.

In July 2022, our board of directors approved our share repurchase program, which authorized the repurchase of up to $2.5 billion of shares of our common stock in open market transactions through November 2024 (the "Share Repurchase Program"). As of December 31, 2023, $750 million remains available for future share repurchases under this program.

Since our inception, we have generated losses from our operations as reflected in our accumulated deficit of $3.1 billion as of December 31, 2023. We expect to continue to incur operating losses on a GAAP basis for the foreseeable future due to the investments we will continue to make in research and development, sales and marketing, and general and administrative. As a result, we may require additional capital to execute our strategic initiatives to grow our business.

We believe our existing sources of liquidity will be sufficient to meet our working capital and capital expenditures for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and potential future equity or debt transactions. Our future capital requirements, however, will depend on many factors, including our growth rate; the timing and extent of spending to support our research and development efforts; capital expenditures to build out new facilities and purchase hardware and software; the expansion of sales and marketing activities; and our continued need to invest in our IT infrastructure to support our growth. In addition, we may enter into additional strategic partnerships as well as agreements to acquire or invest in complementary offerings, teams and technologies, including intellectual property rights, which could increase our cash requirements. As a result of these and other factors, we may choose or be required to seek additional equity or debt financing sooner than we currently anticipate. In addition, depending on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors, we may also from time to time seek to retire or purchase our outstanding debt, including the Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all, including as a result of macroeconomic conditions such as high interest rates, volatility in the capital markets and liquidity concerns at, or failures of, banks and other financial institutions. If we are unable to raise additional capital when required, or if we cannot expand our operations or otherwise capitalize on our business opportunities because we lack sufficient capital, our business, results of operations, and financial condition would be adversely affected.

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Our changes in cash flows were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net cash provided by (used in) operating activities","$","234,700","","","$","(59,431)","","","$","(111,449)"],["Net cash provided by (used in) investing activities","44,040","","","723,228","","","(1,837,360)"],["Net cash provided by (used in) financing activities","(174,015)","","","(226,634)","","","1,721,002"],["Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash","(6,146)","","","1,926","","","459"],["Net change in cash, cash equivalents, and restricted cash","$","98,579","","","$","439,089","","","$","(227,348)"]]
[[/GREPCENT_TABLE]]

Cash Provided by Operating Activities

During the year ended December 31, 2023, net cash provided by operating activities was primarily due to the acquisition and inclusion of operating cash flows from ironSource, and an increase in working capital as our business grows. Our cash flows fluctuate from period to period due to revenue seasonality, timing of billings, collections, and publisher payments. Historical cash flows are not necessarily indicative of our results in any future period.

Cash Provided by Investing Activities

During the year ended December 31, 2023, net cash provided by investing activities consisted primarily of proceeds received from the maturities of short-term investments, which was partially offset by purchases of property and equipment.

Cash Used in Financing Activities

During the year ended December 31, 2023, net cash used in financing activities consisted of repurchases and retirement of common stock, offset by the proceeds from the issuance of common stock under our employee equity plans.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. These principles require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

The critical accounting estimates, assumptions and judgements that we believe have the most significant impact on our consolidated financial statements are described below.

Revenue Recognition

Subscriptions to our Create Solutions provide customers with software, embedded cloud functionality, and software updates. Significant judgment is required to determine the level of integration and interdependencies among the individual promises included in our Create Solutions subscriptions. This determination influences whether the software is a distinct and separate performance obligation that should be recognized at a point in time or whether the software should be combined with other promises and recognized over time. Given that the software and software updates are highly interdependent and interrelated, we have concluded that the two promises would be combined as a single performance obligation and recognized over time. We consider the embedded cloud functionality to be a separate performance obligation, however, its pattern of performance aligns with the software and software updates, which enables us to treat the subscription agreements as one performance obligation that is recognized ratably over the term of the agreement.

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When contracts contain multiple element performance obligations, an allocation of the transaction price to each performance obligation is done based on a relative stand-alone selling price ("SSP"). Judgment is required to determine SSP. Generally, we determine SSP using observable pricing, which takes into consideration market conditions and customer specific factors. When observable pricing is not available, we use cost plus margin analysis to determine SSP.

For advertisements placed through our Grow Solutions networks, we evaluate whether we are the principal, where revenue would be reported on a gross basis, or the agent, where revenue would be reported on a net basis. This evaluation of whether to present revenue on a gross or net basis requires significant judgment. We present revenue on a gross basis for advertising sales where we are the publisher and have control of the in-app placement. Alternatively, we present revenue on a net basis for sales where we are facilitating the transaction between advertisers and publishers and do not have control over in-app placement.

Accounting for Business Combinations

We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values as of the acquisition date. Accounting for business combinations requires us to make significant estimates and assumptions, especially with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected revenues and cash flows from acquired intangible assets; the economic life used on acquired company’s trade name, trademark, existing customer relationship, and contractual relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in our product portfolio; the expected use of the acquired intangible assets; and the discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws.

We use the asset and liability method under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, Income Taxes, when accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is the result of changes in the deferred tax asset and liability.

We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income, and ongoing tax planning strategies in assessing the need for a valuation allowance.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in

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which such determination is made and could have a material impact on our financial condition and operating results. We recognize interest and penalties related to unrecognized tax benefits within income tax expense in the accompanying consolidated statement of operations.