Unity (Minutes): Vector is still in its early stages, and this is a continuous and gradual process.

The following is a summary of the$Unity Software(U.US) FY25Q2 earnings call minutes organized by Dolphin Research. For earnings interpretation, please refer to 《Vector Finally Shows Promise, Is Unity Ready to Join the Table?》

I. Review of Core Financial Information

a. Third-quarter revenue is expected to be $440 million to $450 million, with adjusted EBITDA of $90 million to $95 million. Continued efforts in managing and controlling R&D expenses and optimizing cloud spending. Revenue growth + high gross margin + streamlined structure will bring greater operating leverage, and even with significant investment in high-potential businesses like Vector and AI, profit margins are expected to improve.

b. Grow Segment: Expected to achieve mid-single-digit sequential growth, driven by Unity Ad Network (Vector), with other revenues stable. Unity Ad Network accounts for about half of Grow revenue, and its share will continue to increase.

c. Create Segment: Q3 revenue is expected to be slightly lower than Q2, mainly due to the high base from large customer orders in Q2. Excluding the impact of this large order, strategic Create revenue will grow sequentially in Q3 and achieve high single-digit growth year-over-year.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Overall performance and transformation progress: 2025 Q2 is a turning point, with accelerated product innovation and enhanced customer value driving sustainable growth. Unity Vector has officially emerged, performing far beyond expectations. Revenue and adjusted EBITDA significantly exceeded the high end of guidance.

2. Grow Segment: The growth segment will achieve mid-single-digit sequential growth in Q3. The mechanism of performance advertisers' investment determines that Unity's growth has "automatic scalability." Leveraging its position as the "operating system" of global games, it uses massive behavioral data to further optimize AI and advertising businesses, gradually showing more growth momentum starting in 2026.

a. Q2: Unity Ad Network achieved a 15% sequential revenue growth driven by Vector, with momentum continuing into Q3. Other advertising products were somewhat weak in Q2, partly due to development and promotion resources temporarily allocated to Vector, but this impact is now dissipating.

b. Optimistic outlook for Q3, based on three aspects:

- As product improvements and stricter operational discipline bring results back to normal, we now see significant stability outside of Unity Ad Network and begin to extend our AI-driven capabilities to a broader advertising portfolio.

- The proportion of Unity Ad Network in the growth segment's revenue is increasing, with a greater impact in the future; therefore, our fastest-growing product will have a greater impact on overall performance in the coming quarters.

- Continued investment in AI, with Vector also continuously enhancing customer value. Last quarter, we mentioned that the number and quality of new users brought by Unity Vector increased by 15% to 20%. In the second quarter, these effects continued to rise.

Performance advertisers do not allocate budgets in the traditional way, nor do they necessarily capture market share from competitors. Performance advertisers will continue to increase spending until they reach the limit of their return requirements, throughout the efficiency frontier. We have partnered with 85 of the top 100 mobile games worldwide. As we strive to provide better returns, we expect partners to continue investing in growth, and our business will grow accordingly.

Our confidence in the future of the business partly comes from the fact that we have not yet fully utilized our greatest competitive advantage—the deep consumer insights that Unity, as the global game operating system, possesses. Unity is the world's leading provider of game development, distribution, and operation software, serving billions of consumers.

70% of the world's top mobile games are built on Unity. In our advertising business, this unique perspective will provide our Vector AI engine with access to new, highly differentiated behavioral data, which will become an important potential catalyst for future performance and growth. We expect to see the impact of this work starting in 2026 and continuing into the future. Although we are excited about Unity today, we are equally convinced that this is just the beginning.

3. Create Segment: The Create business strengthens connections with customers and the community, expanding collaboration opportunities.

a. Marked by Unity 6.2 (released this summer), driving product innovation and data governance. Released the Developer Data Framework, empowering developers with tools for data privacy, security, and transparency management.

b. The transition to Unity 6 is progressing significantly, being the most stable and best-performing version we have released to date. The core subscription business achieved double-digit growth again, with Unity 6 downloads exceeding 6.6 million, a 50% sequential increase.

c. Deep AI integration: Unity 6.2 AI features received excellent beta feedback, driving the "intelligentization" of the creation process. Based on platform application data, "predict developer needs, reshape content production methods."

d. Increased investment: Continued emphasis on AI-related talent & products, with further sharing in the future.

4. Strategic Partnerships:

a. Signed major multi-year cooperation agreements with Tencent and Scopely (including in-depth cooperation in both Create and Grow)

- Tencent: Strengthening Unity's core technological position in popular global multi-platform games, enhancing the ecosystem layout in the Chinese market. We are the only company capable of seamlessly supporting the entire ecosystem development in China, including supporting the country's rapidly developing mobile operating system OpenHarmony.

- Scopely (developer of Monopoly Go): Deeply empowering technology and operations. Includes a long-term technical partnership covering creation and growth, aimed at supporting the growth and operation of Scopely games while enhancing the Unity engine to provide a better experience for all customers.

b. Strategic collaboration with Nintendo: Full support for Switch 2 at launch with Unity 6, promoting its third-party ecosystem.

5. Industry Diversification and Emerging Scenarios: Continued high growth in non-gaming sectors, with the gaming subscription business setting a record for 10 consecutive quarters of sequential growth.

a. Automotive: Deepening cooperation with global car manufacturers like BMW and Mercedes-Benz.

b. Healthcare: Specto Medical uses Unity to develop immersive 3D medical applications.

2.2 Q&A

Q: Can the recent strong performance of the Unity Ad Network be extended to other products in the growth segment? Are there any obstacles preventing the core technology behind Unity Ads from being extended to the rest of the growth product portfolio?

A: Unity Vector is a highly modular system, and there are currently no obstacles preventing us from using it to optimize parts or even significant parts of our advertising products.

Q: Vector has been rapidly improving since its full deployment. What is the expected pace of future Vector performance improvements? How much "low-hanging fruit" remains in model optimization to sustain sequential improvements? Additionally, regarding the empowerment of Vector by runtime data, is it true that significant results will not be seen until 2026?

A: The launch of Vector is an important turning point for our business, as we have achieved a "generational upgrade" of core capabilities, fully migrating to a new neural network platform. This platform is more powerful, flexible, and scalable, capable of handling more and more complex data types and responding to data changes in real-time. Therefore, as model learning progresses, these capabilities will continue to enhance, allowing us to delve deeper into key signals within the data.

This investment is still in its early stages and will continue to drive growth for years to come. In fact, the increase in installed capacity and user value we are currently seeing has already exceeded the 15% to 20% from the previous quarter. Although there will be fluctuations each quarter, this is indeed a long-term direction that will profoundly transform our business.

Q: For the Grow products, what are the key evolutionary steps and priority directions going forward? What progress has been satisfactory, and what areas do you hope to further improve? How do you envision the next phase of the Grow solutions in the coming months?

A: The promotion of Vector is still in a very early stage. Our excellent team is continuously investing in enhancing AI models and learning capabilities, and this is just the beginning. In the coming period, we will continue to invest and continuously enhance existing capabilities.

Additionally, as I mentioned in my previous remarks, we will also welcome the next important turning point. As we introduce Unity's user insights as the global game "operating system" into AI, based on the behavioral data of hundreds of millions of consumers, model performance will further improve. We expect to see significant results starting in 2026, and this improvement will continue for many years.

We are currently only at the beginning of a major transformation, already seeing improvements in performance and revenue, while many unique advantages have not yet been fully realized. This is also why we are very confident and expectant about the business.

Q: What caused this $12 million permanent order? Why is it not recurring revenue? Are there any special circumstances or one-time factors? Can you briefly explain the background of this order?

A: Certainly. We are very excited about some of the large partnerships signed this quarter. Matt mentioned a few, such as Tencent, Scopely, and others not specifically mentioned. These contracts involve multiple parts of our business, with some terms determining that a portion of the revenue will be recognized as income upfront, while most of the revenue is still based on the traditional SaaS subscription model, continuously contributing to the business.

We specifically mention this one-time revenue because it is only a small part of the entire contract, positively impacting the second quarter but not extending into the third quarter. It is important to emphasize that the Create business itself is growing strongly, with subscription revenue growing by double digits year-over-year, and strategic revenue growing by 16% year-over-year. Whether or not this one-time revenue is included, the overall performance of the Create business is very healthy.

Q: You mentioned that the "non-Unity Ads" part of the business has stabilized, with overall growth at about mid-single digits. Does this mean that the growth momentum of Vector or Unity Ads has slowed down in the third quarter compared to the second quarter? Can you break down the performance of each part?

A: Sure, regarding the guidance for the Grow business, we expect sequential revenue growth from Q2 to Q3 to be mid-single digits, about 5%. The non-Vector part of the advertising business (accounting for about 50%) will remain stable, so if the overall growth is 5%, it means the Unity Ad Network part will achieve double-digit sequential growth.

The Unity Ads part has achieved sequential growth of over 10% for two consecutive quarters, with cumulative growth exceeding 25% over these two quarters following last quarter's 15%.

Q: With the introduction of more data through the 6.2 version data framework, how have customers responded to integrating more data into advertising products during your communications with them?

A: The core significance of the developer data framework is that the decision-making power for data sharing and usage is entirely in the hands of the customers, and we have highly automated and deeply integrated these functions into the products.

Therefore, customers do not need to communicate with us frequently; they can independently decide which data to share with us and how it is used through switches and options in the interface, just like using other technology products. Each customer can choose as needed, and the entire process requires no additional communication.

Our goal is to make this method of data control the norm, giving customers the initiative to collaborate with us in the way they want.

Q: Can you specifically explain the reasons behind the strong growth in installations brought by Unity Vector? Did it bring more impressions, discover low-cost ad slots, or increase the number of installations per thousand impressions? Can you further explain the influencing factors?

A: In short, the answer is "all of the above." All key drivers have improved: we have created more value for advertisers, reflected in the continuous increase in spending. As we continue to optimize models and introduce more unique data signals, performance will continue to improve. We are very confident in the entire process.

Q: Has the revenue share ratio of Unity Ads changed compared to before?

A: No, we have not made significant changes to the revenue share ratio and pricing method per installation. The overall increase in installation volume and per-customer value has not resulted in a significant change in business profit margins.

Q: Regarding the significant sequential growth in revenue in the China region, was it mainly driven by Vector, or were there other reasons?

A: We are very optimistic about the opportunities in the Chinese market. Most of the revenue growth comes from the improvement of the core Create business, especially the deepening cooperation with major customers and the advantages of Unity engine's multi-platform adaptation beginning to show. Additionally, the sequential revenue growth in the China region was about $20 million, with part coming from the Create business and another part from the Grow business. Overall, both the platform and advertising aspects achieved comprehensive growth in China.

Q: Does the 49% data of Unity Ads only refer to the DSP part?

A: I don't quite understand your question. The 49% refers to the entire Unity Ad Network's part in the Grow business, not just DSP. There are other non-Unity Ad Network parts in the Grow business, which will gradually introduce Vector, involving various advertising products. Perhaps Unity Ad Network mainly corresponds to what you mentioned as DSP.

Q: Regarding the growth of Unity Ad Network in the second quarter, was it mainly incremental contributions, or did it partially cannibalize ironSource's ad spending? How confident are you that when the non-Vector part (such as ironSource) stabilizes, the growth trend of Unity Ad Network will not slow down?

A: The growth of Unity Ad Network has almost no substantial cannibalization of other ad spending like ironSource. Our advertising products operate in a highly competitive market environment, and customers will allocate budgets to platforms with higher returns. We estimate that the internal cannibalization rate between ad networks is less than 10%, indicating that the main reason is the incremental growth brought by creating more value for customers.

We are very confident in continued growth, with the key being to continue enhancing AI capabilities and data quality. From the data, Unity Ad Network will continue to grow in the third quarter, and the non-Vector business is also stabilizing, so we are optimistic about future trends.

Additionally, we believe that using "cannibalization" or "share transfer" to understand this business is not accurate; the core is to achieve growth by enhancing product value.

Q: As content continues to grow, how do you view the strategic importance of the Create platform in improving content quality, relevance, and optimizing user and developer experience?

A: We are very optimistic about the core role of AI in future business, whether in the Grow or Create field. On the Create side, the opportunities brought by AI are equally significant. Unity's greatest advantage lies in its scalability and openness, being an integrated platform for interactive content creators, with no restrictions on the tools or 3D resources used. In the future, Unity will become the orchestration layer for AI-driven content creation.

With an in-depth understanding of project environments and platforms, we can help customers develop games more efficiently and quickly, freeing up more space for innovation and reducing repetitive and complex work. At the same time, distributing games in our operating environment also allows us to support users in acquiring customers and growing more efficiently with AI. Therefore, we are full of confidence in the changes brought by AI in the future and the core capabilities the company has invested in.

Q: Regarding the performance improvement and reinvestment opportunities of the Grow business segment, how should we view the incremental improvement space for this segment's profit margin?

A: Our business contribution margin is very high, with an adjusted gross margin of about 83%, and the incremental profit margin is even higher. The company has optimized its cost structure, so after the business resumes growth, there is room for further improvement in profit margins. Even with significant investment in future growth, profit margins are continuously improving. Overall, we are very confident in the upward potential of the Grow segment's profit margin.

Q: Regarding the promotion of Vector technology to other parts of the Unity Ad Network, when do you think is the right time? What signals or conditions do you hope to see before making this decision?

A: Applying Vector technology to other parts of the Unity Ad Network will be a continuous, gradual process, rather than a plan triggered at a single moment. We have already seen results in some products and will continue to invest and optimize. This will actually become our long-term theme—continuously using AI and data to enhance business performance.

The launch of Vector also gives us more resources, and in the future, it will not only drive advertising products but also expand into content creation and other fields, driving overall innovation and growth.

Additionally, each product itself has independent growth potential, and besides AI applications, it will also drive a return to growth through operational optimization, market strategies, and R&D innovation.

Q: Does the current guidance for Unity Ads assume no further model improvements? If there are further model optimizations, will they all be considered as exceeding expectations? Can you briefly explain the methodology of the current guidance?

A: Our current guidance is based on six weeks of existing data (July-August), and we are satisfied with the current performance, also seeing continuous daily improvements. But we are still in the early stages, so the guidance considers future opportunities while fully weighing related risks. Overall, the guidance reflects the currently known situation, but we will not be overly aggressive in our expectations for future growth.

Q: Regarding the scalability of Vector in advertising deployment, is there room for improvement? Does the company have subsequent product investments to improve the convenience and scalability of advertising deployment? Recently, there have been some doubts about the scalability of Vector.

A: The Vector system has only been online for a few weeks, and although the overall performance is satisfactory and has improved in multiple categories and regions, some customers have not yet achieved ideal results in terms of deployment scale or effectiveness. Advertisers all hope to achieve larger scales under ideal returns, and we will continue to work on system quality and customer customization optimization.

This is a task that requires continuous effort, as each customer, category, and region has unique needs, and we are actively cooperating to optimize. At the same time, the external environment is constantly changing, so there is still much room for improvement and opportunities.

Q: Was the 15% sequential growth in the second quarter achieved steadily throughout the quarter, or did the pace of advertising deployment accelerate as the quarter progressed? What is the current growth trend in the third quarter?

A: Overall, we are now in a very early stage, and although we have already seen good initial returns and continuous growth, we will not further refine the data on the internal pace of the quarter. The most important thing is that the current trend is good, and there is great room for future growth. It is recommended to refer to our overall guidance for specific details.

Q: Regarding the dollar retention rate (DV&E) performance of the Create business and the new Vector model, how is the engine business performing? Is the growth potential expected to be on par with the data at the end of 2022, or is there higher upward potential during the stabilization period?

A: We are satisfied with the current improvement in the dollar retention rate (returning to 100%), with contributions from both the Create and Grow businesses, mainly reflected in the increase in revenue from existing customers and the growth in advertising deployment. The main room for further improvement in the future comes from the increased deployment of Grow business customers, while the Create business will remain relatively stable and predictable, so the further improvement in the dollar retention rate mainly depends on the continued expansion of the Grow business scale.

Q: How do you view the importance of ad mediation and pricing signal collection in Unity's Grow strategy? Will further deep integration of mediation with other Grow functions (such as DSP) help unlock more inventory and sales potential?

A: We believe that the role of Mediation cannot be ignored, but Unity's unique advantage lies in having a large base of game developers and players, achieving growth without relying on winning the Mediation market. We are more focused on continuously creating value for user acquisition (UA) and continuously enhancing the overall platform capability. How mediation develops in the future remains to be seen, but for now, our strategic focus is on driving the overall ecosystem value by enhancing UA capabilities.

Q: When can we expect substantial progress or implementation of deep integration or full embedding of SDK cooperation with top partners like Tencent? How do you view the development pace of these collaborations in the future?

A: It is not convenient to comment on specific customers and timelines, but we can say that we are currently engaged in higher-level strategic dialogues with major global partners, committed to empowering them with the overall platform capabilities to help them expand users and improve development efficiency.

What we really want to point out is that this may be the first time in our history that we can start packaging the full value of our platform for customers. This deep integration is a continuous optimization and gradual advancement process, requiring daily strengthening of data and information connections to achieve continuous value enhancement. Therefore, although there are no obvious implementation nodes, the overall collaboration will continue to advance, and the effects will gradually become apparent.

Q: Has the revenue growth driven by Unity Ads and the ad network under Vectors in the second quarter maintained a continuous growth trend? Has this trend continued in July and August?

A: We are very satisfied with the 15% sequential growth in the second quarter, even though the Unity Vector-related features were not fully launched at that time. The performance has been improving every month, and this momentum has continued in July and August, so we are confident in the mid-single-digit sequential growth of the Grow business in the third quarter. We are optimistic about the current progress and future product and data asset enhancement plans, expecting more positive impacts in 2026.

<End Here>

Risk Disclosure and Statement of This Article:Dolphin Research Disclaimer and General Disclosure