U (Trans): Vector +23% QoQ; Turned Profitable One Quarter Early

Below is Dolphin Research's transcript of $ Unity Software.US FY26 Q2 earnings call.

I. Key takeaways

1. Q3 revenue guide: broad-based acceleration

a. Strategic revenue of $540mn–$550mn, up 44%–47% YoY, accelerating from 38% in Q2.

b. By sub-segment: Strategic Grow +68%–70% YoY (Vector +19%–21% QoQ). Strategic Create +7%–10% YoY, driven by ARPU uplift and China.

c. Non-strategic revenue of ~$20mn, primarily from Supersonic's Jul contribution.

2. Q3 profitability guide and earlier GAAP breakeven

a. Adj. EBITDA of $185mn–$190mn with a 33% margin, +69%–74% YoY.

b. This marks the sixth straight quarter of Adj. EBITDA margin expansion. Up ~400bps QoQ and ~1,000bps YoY, driven by operating leverage and cost takeout from strategic actions.

c. GAAP net income turning positive pulled forward to Q3 FY26 from Q4 FY26.

3. Quarter highlights

a. Aggregate: strategic revenue +38% YoY. Adj. EBITDA $160mn, +77% YoY (2x the strategic revenue growth), 29% margin, +800bps YoY and a record high. Adj. GPM ~82%, improving to 83% in Q2.

b. Segments: Strategic Grow revenue $329mn, +63% YoY, with acceleration QoQ and YoY. Strategic Create strategic revenue $157mn; ex a one-off in the prior-year quarter, +14% YoY.

c. Scope note: shutting down the ironSource ad network had only a slight positive impact on Vector growth. Incremental Vector revenue from ironSource customers was ~$3mn in Q2.

d. Opex: S&M and G&A (Adj.) declined not only as a % of revenue but also in absolute dollars. SBC fell 25% YoY to 14% of revenue, a record low.

4. Cash flow and balance sheet

a. Q2 FCF was $202mn, +59% YoY. Cash balance increased to $2.36bn, moving to net cash from net debt this quarter.

b. Near-term capital plan focuses on de-leveraging, with the 2026 convertible expected to be repaid in Nov.

c. Medium to long term, record cash generation plus a de-levered balance sheet should provide greater capital allocation flexibility.

5. Capital allocation and portfolio reshaping

a. The company made a strategic investment in AppsFlyer alongside Meta, Google and Moloco.

b. Supersonic sale to Tripledot Studios closed on Aug 4.

c. The ironSource ad network was effectively shut down as of Apr 30. Disposing of Supersonic and winding down the ironSource ad network should lift H2 margins and sharpen focus.

II. Call details

2.1 Management commentary

1. AI-driven flywheel

a. AI is now the key driver of product iteration speed and quality, and is becoming the primary demand-side driver.

b. Flywheel: higher game creation efficiency → more titles launched → more titles drive greater platform usage, while making discovery harder → which accelerates ads.

c. The foundation is unique insight from ~3bn monthly players on Unity runtime, used to help creators build better games, acquire users, and run live services.

2. Unity Vector (ads/growth)

a. Management expected 12%–13% QoQ growth for Vector in Q2 but delivered nearly 23%, roughly 2x, with momentum carrying into Q3.

b. Vector did not exist six quarters ago; it is now running at an annualized revenue well above $1bn, ahead of plan by two quarters. The product is still very early.

c. The team shipped 20+ major updates in Q2, connected new runtime data, and redefined how it identifies, understands, and prices user attention. Real-time bidding precision improved to previously unattainable levels.

d. One of the most impactful updates is Day 28 ROAS for in-app ads and hybrid monetization, complementing the IAP product launched in Q1. It measures returns over a longer horizon than standard 7-day ROAS.

e. First released late in Q1 and now fully rolled out, Day 28-related ad spend is up nearly 3x vs. Q1. Over 25% of advertisers have adopted the strategy, with demand scaling rapidly given strong performance.

3. First-time runtime data integration

a. At the end of Q2, Unity began feeding runtime signals directly into Vector's AI models, a pivotal milestone. The connection to 3bn monthly players was previously untapped.

b. Still early, but results are very positive. Management grows more confident that runtime will be a deep, durable competitive edge.

4. Create and Unity 7

a. Unity 7 was announced at Unite Seoul two weeks ago. It is an open, collaborative platform where developers, artists, producers and coding agents can work together across the full development cycle.

b. MCP is free and APIs are open, enabling developers to control Unity via CLI and coding agents within their own workflows without mastering every detail of the app.

c. Crucially, downstream monetization services (Vector, commerce, live ops) are auto-configured on day one. No docs, SDKs, or engineering lift required.

d. Beta is targeted for Q4 FY26 with GA in Q1 FY27. Management views this as potentially the most important release ever, widening the top of the funnel to capture rising interest in interactive entertainment creation.

5. Netflix partnership

a. Unity struck a new deal with Netflix in Q2 to support its multi-platform game ecosystem broadly on the Unity engine.

b. Netflix's approach could be disruptive: instant social gameplay on the largest screen at home, with no downloads, sign-ups or purchases required, opening a new engagement path for users.

2.2 Q&A

Q: How exactly does the positive feedback loop between Vector and Create work, and what do the two businesses bring to each other?

A: Historically they were viewed as separate and reported as segments, but strategically, in product usage and customer connections, they are not. As Unity 7 opens up the platform, more games get created, more creators enter, and efficiency improves, driving more launches.We do not care how users engage with the Unity UI; that is the surface layer. The imperative is to bring as many people as possible into the end-to-end creation platform, which enables scaled deployment, monetization, and growth. The more games on the platform, the more we can deliver Vector, commerce, and live services.As more successful games hit the platform and the market, discovery becomes harder, raising the importance of prediction and fueling ads. This is still early. AI will make interactive creation much easier over time, expanding TAM materially; we will discuss this more going forward.

Q: Runtime data was only integrated at end-Q2. Was its contribution to Vector this quarter major or modest, and what does it imply for the next few quarters?

A: Vector had grown ~15% for four straight quarters and jumped to nearly 23% in Q2. The drivers were sustained product enhancements, better data quality, and model improvements yielding clear client ROI, which in turn lifted our results.Beyond Day 28 ROAS, there were many other enhancements. Runtime integration is a historic milestone and a core future strategic edge: each major player has its path — Meta has owned-and-operated apps, and we have access to 3bn users playing Unity-engine games. This positions us well long term.We started feeding runtime signals into Vector at the end of Q2 with strong results, and clients are opting into the data framework that enables runtime. It is still very early. Isolating runtime's impact is not meaningful; performance reflects the sum of enhancements, higher-quality data, and compounding model gains that self-reinforce as the system learns in real time. This business typically grows steadily with occasional step-ups; Q2 fits that pattern.

Q: How does Unity AI balance credits across tiers with customer value, margins, and unit economics?

A: Unity AI entered public beta in May as an integrated agent tuned for Unity game development. It is very early but encouraging: built on our unique understanding of our software, it outperforms frontier models on many tasks and is almost always more efficient — and efficiency is key.Our strategy is choice: developers can use ours or their own AI. We care first about maximizing platform usage, so we do not plan to restrict customers, which is why Unity 7 opens both CLI and API. Only a small portion of the planned functionality is live today.The end goal is a full toolkit powered by Unity AI plus runtime data — not just code generation, but scaled, real-time content personalization to optimize experiences per player and change how games are built. (Note: management did not directly address the credits vs. margins balance.)

Q: Since Unity Commerce launched in Oct last year and IAP SDK 5.4 went live a few weeks ago, how have your target customers and needs evolved for payments?

A: Commerce reached GA on Jun 30. It is a large and fast-moving opportunity: various estimates suggest D2C monetization now accounts for ~15% of mobile gaming.The product is free for developers. We are integrating partners actively; recently, publisher Hutch used Unity IAP to add D2C purchasing to its hit 'Top Drives'. Like many clients, they avoid added complexity and do not have to manage multiple or standalone SDKs and stores.Commerce offers three benefits: faster, simpler routes for publishers to bypass high channel fees; richer purchase data visibility to further optimize ad models; and some smaller economics to Unity that should scale over time. It is a long-term growth vector.

Q: Vector rose 23% QoQ in Q2 with ~20% guided for Q3. You rarely cite 'step-change model improvements' by quarter — is this a historical driver and future opportunity?

A: Yes. AI is the real engine of iteration speed and quality — we delivered 20+ Vector enhancements in Q2, and the pace is very fast.Progress sits on a three-legged stool of performance marketing: first, ongoing product enhancements, which are accelerating though not every quarter will see 20 updates; second, higher-quality data and better signals, including long-term benefits from runtime and other signal upgrades; and third, as products and data improve, self-learning models get more efficient. Together these deliver tangible client value.We are confident we can sustain this with runtime as a long-term moat.

Q: Can you share more on the scope and economics of the Netflix partnership? How will the initial collaboration unfold and what is the impact for your customers?

A: Its value lies in being a key platform relationship, alongside nearly all major global game platforms. It is a multi-year agreement requiring us to support Netflix's game initiatives, ensure games run well, and make it easy for developers to build games for the Netflix platform.This expands developer opportunities and extends reach to new consumers who may not have played on that platform. The broader point: new platforms keep emerging; interactive entertainment is a fundamental human desire; platforms rise and fall, but innovation persists and players love games.We are eager to help any platform optimize for Unity because Unity is the leading game creation platform globally.

Q: In simple terms, how is Unity 7 different from the prior generation, and how does it support both segments' growth?

A: It is not just another engine upgrade; it fundamentally changes how developers interact with our tech, use coding agents, and collaborate. We re-architected Unity so teams of creators and coding agents can work side-by-side at every stage — previously very hard or impossible, as Unity usage was largely a solo experience.Now, creating interactive entertainment with unlimited collaborators and coding agents is a step-change. We also accelerated each step in the pipeline; once Unity was exposed to always-on, fast-working agents, our own software sometimes bottlenecked development, so we sped up many parts to ensure we are never the wait state.Crucially, there is no traditional upgrade burden: nothing breaks, everything from Unity 6 works in 7, no new language to learn, no barriers. The gap from Unity 5 to 6 was ~7 years; this cycle is ~18 months and will shorten further. In short, Unity 7 raises rendering quality, collaboration, and live-editing — change code once and see it run in the in-progress build.With one or more agents and multi-user collaboration, iteration speeds soar, opening Unity to non-engineers. These agentic workflows accelerate innovation; humans remain essential — great interactive entertainment needs human creativity, not the 'average of all past games'. The tools unlock new, differentiated creations that drive industry growth.

Q: Combining momentum with recent actions, how do you frame long-term incremental margins, and how do you balance growth investment with bottom-line discipline?

A: Two years ago — six quarters back — Vector did not exist; now it is our largest, fastest-growing business, running well above $1bn annualized. Two years ago Create was declining; now it is growing healthily with a strong roadmap and several quarters of QoQ growth.A few years ago Adj. EBITDA margins were just above 20%; now they are near 30%, with GAAP profitability expected soon and quarterly FCF more than doubled. We like the current mix after pruning low-growth, low-margin assets.Our strategy is to grow revenue meaningfully while lifting profitability — we expect both. There is more internal efficiency to unlock; revenue should keep rising. We will keep prioritizing high-growth activities and avoid doing 'everything' in good times, focusing capital on the fastest-growing areas.

Added (CFO): Unity's structural GP is high, with Adj. GPM ~82% and 83% in Q2. We operate on 'investment phase → revenue realization' cycles, yielding high ROI and recurring leverage: invest → monetize → operating leverage.Since Q1 FY25, margins have expanded ~200bps each quarter; Q3 alone should see ~400bps of EBITDA margin expansion given recent strategic steps. We see further room to expand margins.At the same time, top priority remains funding the roadmap to capture these high-ROI opportunities through cash flow and the P&L. Even with that investment, we continue to see leverage and margin expansion. The positive loop of investment, margin expansion, and leverage has truly taken off.

Q: Looking to Unity 7 and the next-gen Unity, how will cross-sell between ads and core Create unfold into 2027?

A: Back to the flywheel: platform usage (including Vector) is the primary driver. Building a game is only step one — without players, monetization, updates, or live services at scale.All infrastructure for scaled live ops resides on Unity; new user acquisition (the lifeblood of most mobile titles) runs through Vector; and store-building plus IAP are integrated into the platform. Tools for more customized, personalized, and compelling experiences via Unity AI also live on this platform.The logic: open the funnel to more creators → they build games → games drive platform usage → Vector is a vital component. When developers work through coding agents rather than the Unity app UI, we can auto-configure all platform components.AI therefore drives more content and easier platform usage. We monetize downstream services, live ops, and Vector — that is the flywheel. The creator base is barely tapped: AI will make creation far easier for consumers.We expect tens of millions of new creators in interactive, similar to how people create linear video on TikTok, YouTube, Instagram. Each will become some form of interactive creator as tools enable it; interactivity uniquely boosts engagement beyond linear video. We are opening software and platform access for them and will share more; they will use Unity in previously impossible ways.This cohort differs from pro users building billion-dollar-scale games and using the platform and Vector. Pros will keep growing, and the market will also expand into lighter, new forms of interactive. We will see both the pro segment extend and the 'prosumer/creator class' expand — enabled by opening the software to coding agents and human–agent collaboration.

Q: Of the flywheel's components, how much is already scaling with visible impact vs. still to come?

A: The best way to gauge created value is revenue growth — when clients see returns, they ramp spend, and revenue rises. Revenue is the direct output of the three-legged stool: quality and nature of product releases, data quality powering Vector, and the ability to improve model efficiency, accuracy, and tuning.Each quarter we push as many positive changes as fast as possible across those legs: self-learning algorithms always run, we ship enhancements, and we keep upgrading data. Runtime integration is only six to eight weeks in, with substantial long-term benefits.Longer term, the advantage comes from more games created on the platform and automatically integrated with Vector, which should drive significant growth. We are bullish on all three legs and on the platform's ability to keep the flywheel spinning faster.

Q: Where is advertiser penetration today (as a share of the total advertiser universe), how has it trended, and what does adoption require — outreach or will ROI pull them in?

A: In gaming, most advertisers know Unity and already spend to varying degrees. The market shifts quickly — especially in Asia — with new entrants emerging, but we have been in this business a long time and good news travels fast.New installs are the lifeblood of mobile gaming. If competitors see returns — this is a highly competitive, closely watched space — they notice and typically reach out, and we likely already know them and they may already be spending.So it is less about building a huge new outbound sales force and more about optimization and account management: testing and scaling per title, handling data and integration, and delivering as much scale and value per advertiser as possible. That dynamic is working strongly in our favor.

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