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Communication, in all its myriad formats, is the cornerstone of a functioning society and nowhere is this more true than when it comes to corporate communication.
When writing about the disaster at Silicon Valley Bank earlier this year, we wrote,
“Silicon Valley Bank (SIVB) was neither a G-SIB or D-SIB but it was the 16th largest bank in the U.S. with $209 billion in assets as of December 31, 2022. It was shocking to see such a large bank collapse in a single day with the FDIC taking control of the bank as of this morning. Things happen gradually and then suddenly. The stock, which was trading over $267 on Wednesday was halted earlier today.
So what happened to trigger this sudden collapse? In three words, a crisis of confidence. The bank made two announcements without thinking through the second order effects of those announcements. Daniel Kahneman’s book Thinking Fast and Slow should have been required reading for the risk and communication departments of the bank.
They indicated that they were selling substantially all of their available for sale securities portfolio for $21 billion and taking a loss of $1.8 billion in Q1 2023. Then they attempted to raise additional capital through an offering. Venture capital firms, private equity firms and their portfolio companies immediately starting withdrawing cash, leading to a crisis of confidence and the eventual collapse.”
The recent action in game engine developer Unity (U) reminds me of Silicon Valley Bank. Even though the consequences were not as dire, it led to the sudden departure of the CEO as discussed below.
Welcome to edition 62 of C-Suite Transitions, a weekly series on InsideArbitrage that tracks appointments and departures at publicly traded companies during the prior week. We highlight five appointments and departures each week by picking the largest companies from the full list of management changes.
Sudden Departures
Unity Software Inc. (U): $30.27
Market Cap: $11.61B
EV: $13.06B
Key Insights
Unity Software runs a platform offering real-time 3D development tools and services for game developers across various devices, including mobiles, tablets, PCs, consoles, and AR/VR devices.
Former President and Chief Executive Officer of Red Hat, James M. Whitehurst has been appointed Interim Chief Executive Officer and President of the company. Mr. Whitehurst will receive an annual base salary of $1.12 million and an award of 200,000 restricted stock units.
Lead Independent Director of the Unity Board, Roelof Botha has been appointed as Chairman of the company.
On October 9, 2023, Unity announced that John Riccitiello would retire as President, Chief Executive Officer, Chairman, and a member of the board effective immediately after serving the company for nearly a decade. Mr. Riccitiello will maintain an advisory role at Unity, ensuring a seamless transition until April 2024.
Upon his departure, Mr. Riccitiello was generously offered an extended exercise period of 5 years in which to exercise any vested equity. In a surprising move, Mr. Riccitiello opted to decline the exercise extension.
Unity is currently undertaking a comprehensive search to identify a permanent Chief Executive Officer.
Decisions Culminating in CEO Departure
The departure of the Chief Executive Officer was anticipated, given the recent controversy surrounding runtime fees.
Unity recently announced changes to its pricing model, opting for a system where developers pay per game install once they hit certain revenue and download benchmarks. This decision sparked a backlash from developers who strongly opposed the changes, fearing potential financial strain on smaller indie developers who rely on the platform.
After facing widespread criticism and calls for reversal, Unity rolled back its pricing changes and introduced a new 2.5% revenue share. Some developers had even called for the dismissal of Mr.Riccitiello, who had become the face of the unpopular pricing adjustments at that time. A primary concern among developers was the lack of control over these fees and Unity’s insufficient transparency regarding how they track the number of installs.
This led Unity to issue a statement clarifying some conditions of its new fees in an attempt to calm the situation and insist the “majority of developers” wouldn’t be affected.
Instead of the CEO being front and center of this situation to address the backlash, on September 22, 2023, Marc Whitten, President of Unite Create apologized and informed developers that the company had updated the runtime fee policy. They also announced that games that generate less than $1 million in revenue within a 12-month period will be exempt from the runtime fee.
Mr. Riccitiello is no stranger to controversy, having spent almost two decades at Electronic Arts, where he served as chief executive. During his tenure, he proposed an unconventional idea of charging players an additional dollar to reload their guns in gameplay garnering negative attention on his leadership approach.
In 2013, he departed from Electronic Arts, expressing regret for the company’s subpar financial performance.“My decision to leave EA is really all about my accountability for the shortcomings in our financial results this year.”
Mr. Riccitiello joined Unity in 2014, not long after his departure from Electronic Arts. During his tenure, he guided the company in transitioning from traditional one-time licensing fees to a continuous subscription-based model. In 2020, he led the company through its initial public offering and initiated a series of acquisitions, including the in-app monetization company IronSource in 2022. When Unity initially went public, its stock was valued at approximately $68. The current stock price of Unity hovers just above $30.
Game developers started looking for options to move on from Unity following the pricing issue. Unity’s competitors include Unreal Engine by Epic Games and open source solution Godot Engine. In fact when you visit the Unreal website, you are greeted with an amazing video loop and a statement squarely aimed at developers that are disgruntled with Unity.
Unity’s Acquisition of ironSource
Last year Unity acquired an Israeli ad tech, ironSource for $4.4 billion. Unity’s investors were taken aback by the deal for three primary reasons.
Following the merger announcement, Twitter was flooded with complaints from game developers, expressing dissatisfaction with Unity’s choice to merge with a labeled “malware” developer. Speculation arose about Unity potentially incorporating advertising malware into its game development engine. Laid-off employees further criticized the decision to acquire ironSource instead of addressing issues with Unity’s own advertising platform.
Layoffs
Unity has undergone staff reductions in recent years, citing a decelerating economy. In May 2023, the company laid off 600 employees, constituting 8% of its workforce, following a prior round of 300 layoffs in January and plans were revealed to cut down offices from 58 to 30.
AppLovin’s Return
Last year Unity rejected AppLovin Corp’s (APP) $17.54 billion takeover offer and said it would go ahead with its planned purchase of ironSource. Later AppLovin withdrew its offer. In light of recent changes at Unity, Citi indicated that AppLovin may reconsider its bid to acquire the company.
Valuation
Unity currently trading at $30, has seen a 66% decline in its stock price since it went public. The company has a market capitalization of $11.51 billion and an enterprise value of $12.96 billion with net debt of $1.23 billion. The company has been growing revenue but net income was negative to the tune of $192 million last quarter.
At the earnings call, CFO Luis Felipe Visoso mentions about margins improving,
“We deliver all this acceleration while significantly improving our profitability, with strong progress on a GAAP and non-GAAP basis. EBITDA was $99 million. We need to get a few hundred thousand more to get to $100 million, but we’re very close to running to that magic number. 18.5% margin is a good place to be, particularly when we look at where we were just 4 quarters ago. In Q2 of last year, we were minus 13%. So from minus 13% to almost 19% just in a year.”
The forward EV/EBITDA ratio is 38.14 and price/sales at 6.30.
Q2 2023 Earnings (Shareholder Letter) (Earnings Call)
Guidance
Unity announced it will release third quarter 2023 financial results on Thursday, November 9, 2023.
Conclusion
The response on the Unity forums regarding Mr. Riccitiello’s departure elicited varied opinions. Some commended the decision as an initial step in rebuilding trust, while others perceived it as a strategy to satisfy shareholders rather than Unity’s user base. Nevertheless, a portion of developers firmly believed that switching away from Unity was not a practical option, and they welcomed the forthcoming alterations.
Unity’s future stands at a pivotal juncture, with much riding on the capabilities and strategic direction set by its new CEO.
Appointments
1. Helen of Troy (HELE): $110.68
On October 4, 2023, Helen of Troy announced the appointment of Brian L. Grass to serve as Chief Financial Officer, Principal Financial Officer, and Principal Accounting Officer of the company, effective as of September 23, 2023.
| MarketCap: $2.63B | Avg. Daily Volume (30 days): 364,040 | Revenue (TTM): $2.01B |
| Net Income Margin (TTM): 6.87% | ROE (TTM): 9.51% | Net Debt: $858.14M |
| P/E: 19.32 | Forward P/E: 12.77 | EV/EBIDTA (TTM): 11.60 |
| P/S (TTM): 1.33 | P/B (TTM): 1.75 | 52 Week Range: $81.14 – $143.68 |
2. Unity Software (U): $30.27
On October 9, 2023 announced James M. Whitehurst has been appointed Interim Chief Executive Officer, President and a member of the Board effective immediately.
| MarketCap: $11.61B | Avg. Daily Volume (30 days): 11,982,574 | Revenue (TTM): $1.81B |
| Net Income Margin (TTM): -54.46% | ROE (TTM): -33.10% | Net Debt: $1.23B |
| P/E: -10.82 | Forward P/E: 54.35 | EV/EBIDTA (TTM): -22.93 |
| P/S (TTM): 5.89 | P/B (TTM): 3.37 | 52 Week Range: $21.22 – $50.08 |
3. Otter Tail Corporation (OTTR): $76.18
On October 2, 2023, The Board has elected Todd Wahlund to the position of Vice President and Chief Financial Officer, effective December 31, 2023.
| MarketCap: $3.18 | Avg. Daily Volume (30 days): 233,267 | Revenue (TTM): $1.36B |
| Net Income Margin (TTM): 19.87% | ROE (TTM): 22.14% | Net Debt: $723.56M |
| P/E: 11.81 | Forward P/E: 17.27 | EV/EBIDTA (TTM): 8.55 |
| P/S (TTM): 2.35 | P/B (TTM): 2.39 | 52 Week Range: $51.06 – $91.86 |
4. Selective Insurance Group (SIGI): $102.31
On October 2, 2023, the company’s Board of Directors appointed Anthony D. Harnett to serve as Interim Chief Financial Officer effective November 4, 2023.
| MarketCap: $6.20B | Avg. Daily Volume (30 days): 272,400 | Revenue (TTM): $3.89B |
| Net Income Margin (TTM): 7.21% | ROE (TTM): 10.64% | Net Debt: $503.27M |
| P/E: 22.99 | Forward P/E: 13.42 | EV/EBIDTA (TTM): 16.60 |
| P/S (TTM): 1.60 | P/B (TTM): 2.51 | 52 Week Range: $83.47 – $106.54 |
5. Insulet Corporation (PODD): $133.45
On September 29, 2023, Insulet Corporation Chief Accounting Officer and Controller, Lauren Budden will serve as Interim Chief Financial Officer and Treasurer, effective October 20, 2023.
| MarketCap: $9.32B | Avg. Daily Volume (30 days): 1,305,418 | Revenue (TTM): $1.47B |
| Net Income Margin (TTM): 4.29% | ROE (TTM): 12.89% | Net Debt: $737.70M |
| P/E: N/A | Forward P/E: 62.50 | EV/EBIDTA (TTM): 70.96 |
| P/S (TTM): 6.40 | P/B (TTM): 16.82 | 52 Week Range: $141.28 – $335.91 |
1. Godaddy (GDDY): $76.40
On October 5, 2023, Michele Lau, Chief Legal Officer and Corporate Secretary of GoDaddy informed the company of her decision to resign effective November 17, 2023.
| MarketCap: $11.24B | Avg. Daily Volume (30 days): 2,716,532 | Revenue (TTM): $4.16B |
| Net Income Margin (TTM): 7.78% | ROE (TTM): -58.44% | Net Debt: $3.21B |
| P/E: 37.02 | Forward P/E: 23.92 | EV/EBIDTA (TTM): 20.25 |
| P/S (TTM): 2.89 | P/B (TTM): 24.35 | 52 Week Range: $64.65 – $85.32 |
2. Myriad Genetics (MYGN): $15.27
On October 4, 2023, Nicole Lambert, Chief Operating Officer of Myriad Genetics and the company mutually reached an agreement that Ms. Lambert would step down from such position, effective October 31, 2023.
| MarketCap: $1.25B | Avg. Daily Volume (30 days): 638,152 | Revenue (TTM): $698.90M |
| Net Income Margin (TTM): -35.51% | ROE (TTM): -29.50% | Net Debt: N/A |
| P/E: -4.99 | Forward P/E: N/A | EV/EBIDTA (TTM): -11.06 |
| P/S (TTM): 1.77 | P/B (TTM): 1.70 | 52 Week Range: $13.92 – $24.21 |
3. Otter Tail Corporation (OTTR): $76.18
On October 2, 2023, Kevin Moug, the Chief Financial Officer and Senior Vice President, of Otter Tail Corporation notified the company of his intention to retire effective December 31, 2023.
| MarketCap: $3.18 | Avg. Daily Volume (30 days): 233,267 | Revenue (TTM): $1.36B |
| Net Income Margin (TTM): 19.87% | ROE (TTM): 22.14% | Net Debt: $723.56M |
| P/E: 11.81 | Forward P/E: 17.27 | EV/EBIDTA (TTM): 8.55 |
| P/S (TTM): 2.35 | P/B (TTM): 2.39 | 52 Week Range: $51.06 – $91.86 |
4. Unity Software (U): $30.27
Unity announced that John Riccitiello will retire as President, Chief Executive Officer, Chairman and a member of the company’s Board of Directors, retired effective immediately.
| MarketCap: $11.61B | Avg. Daily Volume (30 days): 11,982,574 | Revenue (TTM): $1.81B |
| Net Income Margin (TTM): -54.46% | ROE (TTM): -33.10% | Net Debt: $1.23B |
| P/E: -10.82 | Forward P/E: 54.35 | EV/EBIDTA (TTM): -22.93 |
| P/S (TTM): 5.89 | P/B (TTM): 3.37 | 52 Week Range: $21.22 – $50.08 |
5. Roblox Corporation (RBLX): $31.76
On October 5, 2023, Barbara Messing notified Roblox Corporation of her decision to resign as Chief Marketing and Communications Officer of the company, effective December 8, 2023, to pursue other opportunities.
| MarketCap: $19.59B | Avg. Daily Volume (30 days): 10,861,537 | Revenue (TTM): $2.43B |
| Net Income Margin (TTM): -46.81% | ROE (TTM): N/A | Net Cash: $381.04M |
| P/E: -16.87 | Forward P/E: N/A | EV/EBIDTA (TTM): -18.06 |
| P/S (TTM): 7.90 | P/B (TTM): 116.26 | 52 Week Range: $24.88 – $47.67 |
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